Market-linked debentures (MLDs) are a type of non-convertible debenture that, unlike stocks, provide the potential for higher returns than standard fixed-income investments while also controlling risk. In this blog, we’ll look at MLDs, what they are, how they function, and whether they’re a smart investment option for you.
What are Market-Linked Debentures?
Market-linked debentures are debt instruments that offer returns based on the performance of an underlying market index or securities. Unlike traditional fixed-income investments, MLDs do not provide periodic coupons but pay out only at maturity. The returns on MLDs are linked to the performance of the underlying asset, which could be a stock market index or other market indicators.
How do Market-Linked Debentures work?
Market-linked debentures work by linking the interest rate paid on the debenture to the performance of the underlying asset. The interest rate is typically higher than that of traditional fixed-income investments, as the investor is taking on more risk by investing in an asset that is subject to market fluctuations. If the underlying asset performs well, the investor receives a higher interest rate, and if it performs poorly, the interest rate is lower.
For example, let’s say a company issues an MLD with the Nifty 50 as its underlying index at a 9% per annum coupon. The maturity period is 18 months. As per its terms and conditions, the interest amount will be paid only if Nifty 50 does not fall more than 15% from its level at the time of issuance of these MLDs. If it falls more than the specified percentage, the issuer will return only the principal but not the interest amount.
Who should invest in Market-Linked Debentures?
Market-linked debentures may be a good investment option for investors who are looking for higher returns than traditional fixed-income investments but are willing to take on more risk. They are also suitable for investors who want exposure to asset classes that are not readily available to them.
However, it is important to note that MLDs come with credit risk, as the issuer may default on the payment of interest or principal. Therefore, investors should carefully evaluate the creditworthiness of the issuer before investing in MLDs.
Benefits of Market-Linked Debentures
- Potential for higher returns: MLDs offer the potential for superior returns compared to traditional fixed-income investments. If the underlying asset performs well, investors can benefit from higher interest rates.
- Diversification: MLDs provide investors with exposure to different asset classes, allowing them to diversify their investment portfolios. This can help mitigate risk and potentially enhance overall returns.
- Tax efficiency: MLDs can be a preferred investment product for High-Net-Worth individuals looking for tax-efficient returns. They may offer tax advantages depending on the jurisdiction and the specific structure of the debenture.
Conclusion
Market-linked debentures are a unique investment option that offers the potential for higher returns compared to traditional fixed-income investments while also managing risk. They work by linking the interest rate paid on the debenture to the performance of an underlying asset, such as a stock market index. MLDs may be suitable for investors who are willing to take on more risk and want exposure to different asset classes. However, it is important to carefully evaluate the creditworthiness of the issuer before investing in MLDs.
How can iCreditSpace make this easier for you?
iCreditSpace is India’s Best Investment App that simplifies investments for you and gives you low-risk investment options in India. Investing with iCreditSpace is a great method to build your wealth and reach your financial goals. iCreditSpace is a good solution for both experienced and beginner investors in India, thanks to its simple platform, investment compounding capabilities, and Smart AI technology. So, if you’re seeking a safe and reliable platform that provides high returns on your investments, iCreditSpace is an excellent option for the best fixed-return investment in India.