India’s Best Portal for Market Linked Debentures I Structures

Structured Products are generally close ended hybrid instruments which could be either with principle protection or without principle protection. The underlying security is generally a non-convertible debenture of the issuer linked to an equity index (nifty 50, bank nifty etc), 10 year G-Sec, gold index etc. They are issued for the period of 13 months to 60 months and generally require minimum investment of Rs 25 lakh and more. Unlike a bond that pays a fixed interest either monthly, quarterly, half yearly or annually, MLDs do not pay any regular income, it comes only at maturity.

Theoretically these MLDs can be considered to be a zero coupon bond and an embedded customized payoff that could be an equity option. Assuming a 3 year NCD, on the date of Issuance a Rs. 100 received from the investor could be considered to be broken up into a Zero Coupon bond of Rs. 77.75% and a bought customized payoff / equity option for the balance Rs. 22.25%. The Zero Coupon bond of the MLD matures into Rs. 100 at the end of 3years (by investing that money in the business of the company), thus ensuring principal protection. The embedded equity option generates the customized equity linked pay-off for the investors.

Why MLDs?

Following are the benefits of investing in MLDs:

  • Capital Protection - MLDs comes mostly with capital protection feature

  • Potential to earn higher returns than those offered by fixed deposits or other debt instruments

  • Risk Return Dynamics – return enhancement through growth assets with calculated level of risk

  • Hybrid Exposure – exposure to varied asset class for obtaining stable returns

  • Customized view – capitalize on specific market views / theme (eg. Bullish on single stock / sector, near term bearish, etc.)

Tax Efficiency:

Structured Products / MLDs are getting popular amongst the high net worth investors, Institutional Investors and family offices on account of the tax treatment they attract. Like all other listed bonds, long term capital gains earned on listed MLDs are taxed at 10%, if MLDs are sold after a year. Bond funds impose a long – term capital gains tax 20% (after indexation) on gains on investments, if held for 36 months. Interest income earned on traditional fixed deposits and debentures is taxed at marginal rate of tax.