While debt securities allow investors to enjoy a certain level of security, their returns are comparatively lower than equity-linked schemes. On the other hand, market-linked debentures (MLD) offer returns on the basis of the performance of an underlying market instrument and can help in generating higher returns.
The high-return prospects of this investment avenue have made it quite popular among investors. Initially when market linked debentures had been launched, they failed to draw the expected buy-in. It is likely that investors’ perception of it being a complex investment tool led to its slow adoption.
Read on to learn more about MLD debentures and how they work.
Market-linked debentures are non-convertible debt instruments that differ from other debentures. Unlike regular debt securities, their returns are linked with market conditions, particularly to the indices associated with them.
Contrary to other debt instruments that offer regular returns in the form of interest, these securities pay returns at maturity along with the principal amount. The tenor of these debt instruments range from one year to five years.
In terms of market-linked debentures’ taxation, their returns were earlier taxed at 10% , if held for more than a year. However, the Union Budget 2023 proposed the levying of taxes on these securities as per the individual’s tax slab rates irrespective of the period of holding. The capital gain on the market linked debentures shall always be taxable as short-term capital. The interest income earned will also be subject to TDS @ 10%.
As an investor, you can enjoy the following features and perks by purchasing market-linked debentures in India.
MLD debentures are non-convertibles, which means that you cannot convert them into equity shares
The Securities and Exchange Board of India (SEBI) regulates these debt instruments
The performance of these securities depend on the performance of the underlying asset.
The minimum amount that you invest in this scheme is ₹1 Lakh, brought down from ₹10 Lakhs by SEBI w.e.f. January 1, 2023
Various credit agencies rate MLDs, helping investors choose high-quality instruments that have a lower risk of default
MLDs do not make regular interest payments like other debt securities
The principal and accrued interest are receivable only at the maturity
These securities allow investors to diversify their portfolios and stabilise their total returns
There are two types of market-linked debentures in India:
A principal-protected market-linked debenture (PP-MLD) is one that guarantees a blend of fixed income and market associated returns. Simply put, you will receive the principal sum invested in this scheme, including the interest accrued at a lower rate, as compared to other market-linked schemes.
Non-principal protected market-linked debentures (NPP-MLD) offer a higher return potential unlike the former. However, they also hold a greater risk of capital loss during adverse market conditions.
You are being redirected to the third party web-application. However, we would want to appraise you that “Investments in debt securities are subject to market risks. Please read all the offer related documents/information carefully before investing."
The minimum limit of investment in market-linked debentures is ₹1 Lakh. Earlier, this cap had been set at ₹10 Lakhs.
Yes, you can sell market-linked debentures on stock exchanges before their tenors end.
MLDs are taxed as short-term capital gain as per the individual’s tax slab rates irrespective of the period of holding. The interest income earned will also be subject to TDS @ 10% and will be taxable in hands of holder as per his slab rates under the head income from other sources.
These debts are associated with the Nifty, Sensex, government bonds with a tenor of 10 years, and the gold index.