Market Linked Debentures

Market Linked Debentures (MLDs) are a type of debt instrument in the financial markets whose returns are linked to the performance of a specific market index or a basket of underlying assets, such as equity indices, commodities, or other financial indicators. MLDs combine elements of debt and equity investments and offer higher potential returns than traditional fixed-rate debentures, but with higher risk.

Here’s how MLDs work

  • Link to Market Performance: The returns from MLDs are not fixed. Instead, they are tied to the performance of an underlying asset or index, like the Nifty or Sensex in India. The value of the debenture fluctuates based on the performance of the linked market.
  • Principal Protection: Some MLDs offer principal protection at maturity, meaning the principal amount (the original investment) is returned at the end of the tenure if the market performs within certain parameters. However, the return or coupon may vary.
  • Structured Products: MLDs are structured products, meaning they often combine debt elements (such as guaranteed returns on principal at maturity) with equity-like exposure, hence higher potential for returns than regular debentures.
  • Issuers: MLDs are typically issued by financial institutions or corporations and can have maturities ranging from a few months to several years.
  • Risk and Return: While MLDs can offer high returns in favorable market conditions, they carry a level of risk. The return depends on market conditions, and investors are exposed to the risk of underperformance, potentially leading to lower returns or no returns at all in some cases.