Market Linked Debentures (MLDs) Compare

Additional Useful Information

• Market Linked Debentures can be of two types –
• Principal Protected Debentures – These are Market Linked Debentures which guarantee the repayment of principal amount.
• Non-Principal Debentures – These are Market Linked Debentures which do not guarantee the repayment of the principal amount. However, they typically offer higher returns as compared to principal protected debentures.

• When an investor purchases Market Linked Debentures, the issuing company is bound by a legal contract wherein they are obligated to make an interest payment to the investor at maturity provided the index level criteria is met.

• Every MLD is assigned a credit rating by a credit rating agency. Higher credit ratings mean that the safety of the investment is higher, and therefore risks involved are lower. However, lower credit means that the risks of investing in such bonds are higher.

• Investing in Market Linked Debentures is suitable for investors have an investing horizon of 3+ years.

Returns *

• Market Linked Debentures do not guarantee any returns. Their returns are linked with a certain market index depending on how that underlying index has moved. For example –
• DEF Corp issues a market-linked debenture (MLD) for a period of 20 months. The return on this MLD is 14% XIRR (annualized return), but with one condition: the stock market index, Nifty, must not fall below 70% of its value when the MLD was issued.
• Here’s how it works:
• At the time of issuance, let’s say the Nifty is at ₹22,000.
• If, at the end of 20 months, the Nifty is still above or equal to ₹15,400 (70% of ₹22,000), DEF Corp will pay you the principal amount plus 14% XIRR as interest for the 20-month period.
• However, in a worst-case scenario where the Nifty falls below ₹15,400 at the end of 20 months, DEF Corp will only return the principal amount, and no interest will be paid. This ties the MLD’s return to the performance of the stock market index.

• Typically, Market Linked Debentures can generate returns ranging from 4.5% to 12% per year, depending on the credit rating and maturity period.

• Market Linked Debentures usually provide higher returns as compared to bank fixed deposits and government bonds.

Risk Level

• Market Linked Debentures are considered high risk investments.

• Market Linked Debentures have a credit risk associated with them. This means that if the market goes down below the level specified by the index, no interest is paid and only the principal is paid back.

• Market Linked Debentures become riskier during times of economic downturn. This is because there are chances of market falling in a bad economy.

• Based on the credit risk, all Market Linked Debentures are provided with a credit rating by a credit rating agency. This helps in determining how safe or risky the Market Linked Debentures are. Investors should analyse this rating to understand the risk more accurately.

Liquidity

• Market Linked Debentures are typically illiquid.

• They can be sold at any given time prior to maturity. Off-market transactions are carried out to sell MLDs. However, it is possible that there may not be a buyer for the bond. There is no guarantee that the bond will be sold.  In this event, the investor continues to hold the bonds till maturity and earns interest at maturity.

• The liquidity of MLDs is lower than other debt instruments and bonds.

Interesting Facts

• The highest quality Market Linked Debentures on credit rating scales are commonly rated as "Triple A (AAA)” debentures, while the lowest quality Non-Convertible Debentures are rated as "Junk (BB and below)" debentures.

• Lower rated debt instruments offer higher yields than higher rated instruments, but higher yields come with higher credit risks.

Tax Implications

• Earnings received from Market Linked Debentures are taxable.

• When investors sell their MLDs, the difference between the Sale Amount and Purchase Amount is typically called “Capital Gain” or “Capital Loss” (if sale amount is lesser than the purchase amount).

• In case of Capital Gain, this amount is to be added to the taxable income of the investor and taxes are required to be paid based on the applicable income slab.

• There is no tax in case of “Capital Loss”.

• Interest earned by investors from Market Linked Debentures are to be added to their total taxable income and taxes are required to be paid as per the income tax slab.

Where To Invest

• https://www.dezerv.in/bonds/mld-market-linked-debentures

• https://www.bondsindia.com/market-linked-debenture.html