Market Linked Debentures (MLDs): Invest, Meaning, Types & Benefits (2024)

FAQs

Market Linked Debentures (MLDs): Invest, Meaning, Types & Benefits? ›

Market Linked Debentures (MLDs) are like a stock market investment with a safety net. They grow if the market goes up, but you usually get your money back at the end (like a bond). They're good for investors who want some growth potential but also some security.

MLDs typically don't have interest payments. Hence, you need not worry about reinvestment risk. But that also means that they are more volatile than normal bonds. But MLDs have a different risk that other Bonds are not subject to - market risk.

Advantages of Market Linked Debentures

For example, if you invest in an MLD that pays a coupon of 10% per year if the Nifty 50 index rises by more than 15% from its initial level at maturity, you can earn a handsome return if the index does well.

Market Linked Debentures (MLDs) are debt instruments that offer returns linked to the performance of an underlying financial market index. Previously, if an investor held an MLD for more than one year and then sold it, the returns were classified as long-term capital gains and were taxed at a lower rate of 10%.

The potential returns and risks associated with MLDs are contingent on the chosen underlying asset or index. For example, MLDs linked to stock market indices are often more volatile compared to MLDs tied to government bond indices.

– Taxation: MLDs are generally taxed as capital gains. The tax treatment depends on the holding period; if held until maturity, they are typically treated as long-term capital gains, which can be more tax-efficient than the interest income from traditional debentures, subject to the prevailing tax laws.

Because debentures are debt securities, they tend to be less risky than investing in the same company's common stock or preferred shares. Debenture holders would also be considered more senior and take priority over those other types of investments in the case of bankruptcy.

The use of debentures can encourage long-term funding to grow a business. It is also cost-effective when compared with other forms of lending. Debentures usually provide a fixed rate of interest for the lender, and this has to be paid before any dividends are issued to shareholders.

Debentures are generally considered to be safer investments than shares as they offer fixed income, and there is no risk of capital loss. Shares can provide a higher return on investment. However, they also come with more risk as they are subject to market fluctuations in price.

Answer: False. Debentures are not always fully paid up. Debentures are a form of debt instrument issued by companies to raise capital.

What are the tax benefits of MLD? ›

With this set-off, MLD investors with these losses pay no taxes against the MLD STCG. They can also carry forward any short-term capital losses incurred by liquidating their MLDs before maturity for the next eight years and set them off against STCG and LTCG from any other asset.

NRIs are allowed to invest up to 5% of the paid-up value of each series of debentures of listed Indian companies on repatriation or non-repatriation basis.

Interest on securities earned by FIIs/FPIs is covered by Section 115AD of the Act and this section excludes interest income under Section 194LD w.e.f. 01.07. 2023 and the same is covered under Section 196D with the TDS rate of 20%.

Shares, debentures, and bonds are investment options with varying returns and performance. Shares represent company ownership, while debentures and bonds are debt instruments. Debentures are riskier, bonds are safer, and shares have high liquidity.

Despite the many benefits of issuing debentures to raise funds, debentures have certain limitations: A company has to pay a fixed charge on each debenture issued, despite the company's losses. Because of this, it puts permanent stress over the income of the company.

Disadvantages of debentures include fixed interest payments, preference in repayment, creation of charge on assets, lack of voting rights, and long-term obligation. These risk factors can be balanced considering the cost of debentures.

We operate under the highest ethical standards and work tirelessly to provide long-term value to all stakeholders. Since our public listing in 1994, we have delivered compound average annual total shareholder return of 13.6%, outperforming the US REIT sector and the S&P 500 during that timeframe.

Bond market strategists and fund managers generally agree that yields are still attractive, especially relative to inflation, and will likely stay higher than before the pandemic.

Investment-grade bonds: Investment-grade bonds are viewed as good to excellent credit risks with a low risk of default. Top companies may enjoy being investment-grade credit ratings and pay lower interest rates because of it.

Equity-linked notes provide a way for investors to protect their capital while also getting the potential for an above-average return compared to regular bonds. In theory, the upside potential for returns in an equity-linked note is unlimited, whereas the downside risk is capped.