Market-linked debentures: What they are, how to invest
What's the story
Market-linked debentures (MLDs) are becoming a popular investment option in India, thanks to their unique structure and potential for higher returns. Unlike traditional fixed-income securities, MLDs are linked to the performance of underlying assets such as equity indices or commodities. This makes them an attractive option for investors looking to diversify their portfolios and gain exposure to market movements without directly investing in equities.
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Understanding Market-Linked Debentures
Market-linked debentures (MLDs) are a hybrid financial instrument that combines features of both debt and equity. They offer returns linked to the performance of underlying assets, such as stock indices or commodities. Unlike traditional bonds, which offer fixed interest payments, MLDs do not guarantee fixed returns. Instead, they offer returns based on the performance of the underlying asset over a specified period.
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Benefits of investing in MLDS
Investing in MLDs comes with several benefits. First, they provide an opportunity for higher returns as they are linked to market performance. Second, MLDs usually have lower risk than direct equity investments since they are structured as debt instruments. Third, MLDs can be customized according to investor preferences by choosing different underlying assets or structures.
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Risks associated with MLDS
While MLDs offer attractive benefits, they also come with certain risks. The biggest risk is that of market volatility, as returns depend on the performance of the underlying asset. If the asset performs poorly, it can lead to lower or even negative returns. Further, liquidity risks are also present since MLDs may not be easily tradable before maturity.
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Tips for investing wisely in MLDS
When investing in market-linked debentures, it is important to understand the underlying assets and their associated risks. Diversifying across multiple MLDs with different underlying assets can help mitigate risk and enhance potential returns. Further, considering factors like maturity period, credit ratings, and issuer reputation is crucial before making investment decisions.