MARKET LINKED DEBENTURES-MLD

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What are MLDs?

MLDs are market-linked debentures where the returns are not fixed. They are determined by the movement in the underlying market index. They invest in various instruments, including but not limited to equity, government bonds, bonds, gold index, Nifty Index fundetc. As mentioned in the scheme investment details, the underlying instruments are determined based on the mandate. The tenure of the funds could range between 1 – 5 years. The pay-out happens at maturity in these instruments, the returns are accrued, and principal and accrued returns are paid out upon maturity.
REGULATED BY SEBI.

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Majorly there are two types of Market Linked Debentures-

  • Principal Protected
    These MLDs have a capital protection feature. Here, the capital or principal amount is guaranteed, despite extreme volatility in the market. It is an effective downside protection investment. If the market movement is downward, you may get zero returns, but you would still get the capital amount. If the market movement is favourable, you are likely to get commensurate earnings.

  • Non-Principal Protected
    The risk is significantly higher as the principal is not protected. While the potential is relatively high, the downside probability is also high.

Features:

Below are some of the common features among MLDs:

  • Minimum investment amount in MLD is Rs. 10 lakh – Rs. 25 Lakhs, regulated by SEBI.
  • They are generally issued with a tenure ranging between 1 – 5 years.
  • Credit rating agencies rate MLDs. The default risk is dependent on the rating of the instrument. Typically, AAA and AA+ are considered high-quality instruments with relatively lower risk.
  • MLDs do not pay regular income like many of the fixed income securities, the payment is made only upon maturity, and both principal and accumulated returns are paid out at maturity.
  • There are listed / unlisted MLDs and secured / unsecured MLDs. Their liquidity is managed for unlisted instruments as the issuers sometimes buy back the MLDs.
  • MLDs are aimed at a niche clientele. They are highly customised to cater to the specific needs of the investors that they cater to.