What is MLD?
Market linked debentures (MLDs) are debt instruments that generate returns based on the performance of a specific market index or instrument. In simple terms, these are debentures on which interest rate is not fixed, but depends upon some external index like Nifty, Sensex, etc.
They are issued by companies or financial institutions.
How does MLD work?
MLDs are debt instruments issued by companies through a private placement route. They have a fixed maturity, from 12 months to 60 months. MLDs do not have fixed returns though. The return on MLDs depend on the movement of an underlying market index or instrument, such as equity benchmark, government yield, gold index, etc. The underlying index or instrument is pre-specified in the offer document of the MLD.
The returns on MLDs are paid at maturity along with the principal amount.
For example, a company may issue an MLD that pays a return of 20% if nifty moves up by 10% in 36 months, a pro-rata if nifty moves between 0-10% and 0returns if nifty is negative. In this MLD, an investor can participate in equity upside while at the same time protecting its principal.
Types of MLDs
Principal protected MLDs: These are the most popular types of MLDs, offering principal protection while enabling participation in the equity market. They typically provide returns linked to any market index. Even if the market declines, you still receive your full principal back.
Non-principal protected MLDs: These MLDs allow participation in the equity market on both the upside and downside. The principal is not protected in these, and they usually offer higher returns compared to the principal protected versions due to the higher assumed risk.
Who should invest in MLD?
If you're a new investor with limited understanding of markets, it's best to begin your investment journey with mutual funds. However, if you have a good investing experience, you should consider investing in MLDs.
Typical use cases of MLDs are
- When your investment horizon is 3 to 4 years and you want to consider taking exposure to the equity market. Typically, equity investments are done with long horizon, usually 7 years or more. If your horizon is mid term, say 3 to 4 years, you should consider MLDs
- MLDs have a distinct risk-return characteristic, making them ideal for inclusion in portfolios for diversification of risk.
- Principal protected MLDs are good instruments to take equity exposure without taking a risk on the principal.
How to invest?
MLDs are private placement debentures, issued by various companies from time to time. It can be difficult to track good opportunities on an ongoing basis. At Goalstox, we can help you select the right scheme for you to fit your goals and risk profile.