Market Linked Debentures are non-convertible debentures wherein the returns are not fixed however they are linked to the market.
The returns are determined on the performance of the underlying index. The underlying index could be equity benchmark, government yield, gold index etc.
The advantage is that you are getting the exposure and upside in other markets such as equity (NSE Nifty) or G-sec, without taking as much of a risk as in investing directly into that asset.
Market Linked Debentures are issued by corporate with a minimum net worth of Rs 100 crore.
Each issuer is free to choose the underlying index or security to which the payoff for investor is linked. Generally, a widely traded asset is chosen as the underlying asset so that it is not easy to manipulate.
MLDs are debt instruments wherein the investors are generally sophisticated investors as this product is complex and has a high investment value.
The minimum amount of investing in MLD is Rs25 Lakhs.
They are generally issued with a tenure of one to five years.
They are regulated by SEBI(The Securities and Exchange Board of India).
Unlike a bond that pays a fixed interest either monthly, quarterly, half yearly or annually, MLDs do not pay any regular income; payment is made only at maturity.
MLDs may be listed/unlisted or secured/unsecured. They are liquid instruments which are bought back by the issuers at times.
MLDs are highly customised as they cater to a sophisticated investor base.
MLDs come with a Capital Protection feature wherein here it is guaranteed that you will at least get back the principal amount on maturity, even if the movement in the other market is severely adverse. That is your downside is protected because in the worst case, you will get zero return but will get your investment amount back. On the other hand, if the movement in the other market is favourable, you will get commensurate returns.
MLDs are rated by independent Credit Rating Agencies. The participation rate can be higher to entice investors, if the MLD come with a lower rating.
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