Key Features of Market-Linked Debentures
Tied to Market Performance
MLDs are related to the flow of market assets like equity indices, shares, specific commodities, or even exchange rates of currency. This makes them more dynamic than most other debt products in the market.
Principal Protection (Optional)
In some MLDs, there is the facility of some level of principal protection whereby an invested amount of money cannot decrease below the principal invested provided certain stipulations as to the performance of the underlying asset.
No Regular Interest Payments
In contrast to bonds and fixed deposits, no interest is calculated, either for the rest or simply. However, all the gains are obtained at the end of the tenor provided under the MLD depending on the underlying asset.
Maturity Period
While the MLD can be defined across a time span as wide as 1 to 5 years, some plans may vary depending on the product in focus.
High Return Potential
Major ventures that find VC funding are in industries where growth options are highly scaled and comprise the technological, health care, renewable energy, and financial technology sectors.
Tax Efficiency
In terms of the tax regime, it is expected that the MLD, howsoever constituted, could be eligible for a particular tax regime that is more advantageous; or, through the tax roll-over losses in the event that it holds some investments for a period of over one year, the MLD could benefit from LTCG tax on sales.
How Market-Linked Debentures Are Issued?
Venture capital financing involves consolidating capital from the rich HNIs and UHNIs, high-net-worth institutions, and VC firms to invest in early-stage companies. Essentially, it follows a process typically differentiated into the following steps:
Issuer Selection
Depending on the industry and specific type of issuer participating in the creation of the MLD (bank, energy company, etc.), the structure of the product differs and can be sold to the public. The need for these instruments also features in the issuance process in some ways.
Designing the MLD
The making of the MLD’s structure is entirely at the discretion of the issuer based on factors such as the linked asset – an equity index, a commodity, etc, the maturity date, the participation rate, and its choice of whether it wants the instrument to offer principal protection or not.
Regulatory Approval
Any MLD document needs to obtain the approval of the SEBI or any other required regulatory body before such a product can be marketed to the investors.
Pricing and Offering
After obtaining regulatory approval, the issuer determines the price for the issue of the MLD and also the time for which the subscribers can subscribe to the instrument.
Subscription and Issuance
Users can subscribe during the offering period, after which the MLD is released, and money is raised to support the product.
Performance Monitoring
In other words, an assessment of the performance of the underlying asset is made over the life of the MLD. Surplus in its finality, is the result of calculated returns based on the ability of the asset within the course of the investment horizon.
Types of Market-Linked Debentures
Equity-Linked Debentures (ELDs)
Index-Linked Debentures
Commodity-Linked Debentures
Currency-Linked Debentures
Hybrid MLDs
Advantages of Market-Linked Debentures
Potential for Higher Returns
When the underlying commercial asset is performing well, it is quite conceivable to produce higher returns compared and fares much better than traditional fixed-income products hence being favorable for HNIs and UHNIs.
Diversification
Being a type of investment vehicle, MLDs offer an investor a chance to invest in a range of investments from stocks to commodities to currencies making it a good way to diversify investment.
Principal Protection (In Some Cases)
Some of the MLDs employ principal protection where the outstanding value of the asset at maturity (when the underlying investment is called) is guaranteed but contingent on the performance of the asset in question.
Tax Benefits
MLDs held for more than a year may be eligible for the long-term capital gains tax rate which as a rule, favorably compares to income from fixed-income securities.
How Anand Rathi PCG Can Assist with MLD Investments?
For the HNIs and UHNIs intending to invest in the Market-Linked Debentures, Anand Rathi PCG offers critically important advice and bespoke recommendations. With expertise in structured debt products, Anand Rathi PCG ensures that clients receive tailored guidance:
Choosing the Right MLD
Based on such concerns, the team at Anand Rathi studies every client’s financial objectives towards offering the suitable MLD to constitute the organizational MLD investment plan.
Understanding the Product
In return, the client has detailed information regarding how the MLD operates, the portfolio of the assets, the expected return, and the risk involved.
Investment Strategy
Anand Rathi PCG assists in including MLDs into an existing portfolio in a mutually beneficial strategy of the client’s risk and time preference.
Ongoing Monitoring
Clients also constantly receive updates on MLD investment performance and get comprehensive reports and if they need to, modify the investment strategy.
FAQs on Market-Linked Debentures
What are the risks of Market-Linked Debentures?
- Market Volatility: MLDs give back proportional to the performance of the anchored asset and can produce returns with movements in the marketplace. This scenario can lead to a lower return on or even loss-making in any undertakings in which the investor is involved.
- Liquidity Constraints: These securities are usually subordinated, meaning they can be sold at a lower price before the maturity date.
- Issuer Risk: In the event the issuer is in some kind of financial stress then it is possible to get to a scenario where there will be default coupled with failure to recover the initial invested capital plus returns.
- No Regular Income: An interest within MLDs does not have a fixed repayment schedule, which makes it contrast Apt with bonds or fixed deposits that provide recurrent interest returns.