The returns on bonds are known upfront. On the other end of the spectrum are equity investments whose returns are uncertain. Market-linked debentures (MLD) combine the attributes of these two types of investments.
What is Market Linked Debentures and how do they work in India?
Market Linked Debentures are instruments that do not have a fixed pay-off. Instead, their payoff depends upon the performance of another index like Nifty 50 or security like the 10-year G-sec. Upon maturity, a payoff or return payable is accrued along with the initial principal payment. This return payable is dependent on the movement of the underlying index or security that the Market Linked Debentures follows, as initially defined in the terms. For instance, if the terms of investment state that 80 percent of the upward movement of the index is payable, then a 20 percent rise in the index would reap a payoff of 16 percent over the tenure of the MLD.
Moreover, a category of Market Linked Debentures called the principal protected MLD guarantees a payback of the principal amount even if the underlying index witnesses a negative performance. For instance, suppose a 9 percent coupon payment is attached to a Market Linked Debentures with a G-sec maturing in 2030 as the underlying security. However, this payoff comes with a condition that the coupon payment will be made only if the G-sec does not fall 25 percent in price at the end of the Market Linked Debentures tenure. If the G-sec price falls more than 25 percent, the investor only gets back the principal amount.
Hence, Market Linked Debentures ensure that the investor is protected against a downside in the underlying market while extending lucrative gains if the underlying market witnesses a positive performance.
Read more - Top 5 Safe Investments with Stable Returns in India?
What about Nifty Linked Debentures?
Nifty-linked debentures are debentures linked to a Nifty index like Nifty 50 or Nifty 100. The payoff from such debentures depends on the performance of the underlying Nifty index. So, if the index goes up, the investor makes commensurate gains and if it goes down, the investor still gets his invested money back.
Things to know about Market Linked Debentures in India