MLDs or market-linked debentures help preserve capital during bearish times; in bullish ones, they provide equity-like high returns.
Currently, there’s an MLD promising 1.5x the returns of its underlying index over a span of 2 years. If the index grows 22%, the investor stands to gain 33% returns over 2 years.
The maximum you can earn through this MLD is 33%. Even if the index grows more, you can earn at most 33% over two years.
In the worst-case scenario, if the index goes red, you can recoup the initial investment. This is for MLDs that vow to protect your principal at the outset. So, read the fine print
While MLDs can grow your wealth by 33 per cent, these are absolute returns over two years. The annual returns are actually 15.3 per cent – and this is the most you can earn.
Let’s run you through them.
You need at least a lakh to invest in these debt securities. MLDs are like a loan you give to companies or financial institutions, not directly, but through a private placement.
Since a large portion of the funds are loaned to private companies with poor credit ratings, there is a risk of a default. This makes MLDs quite risky.
While most of these securities are principal-protected MLDs, you may find a few unprotected ones that offer no guarantee of the initial investment.
Earlier, long-term gains were taxed at a favourable 10% rate. Now, earnings from MLDs fall under the investors’ tax slab irrespective of holding period. Bad for high income earners
Worse, there’s a 10 per cent tax on interest income, which gets deducted when receiving the income.
Although the blue sky scenario is earning around 15.3 per cent annually, the relatively short maturity periods of MLDs (mostly 2 years) make them a poor fit for long-term plans.
To know what you should do, check the link below