CHANGING TIDES

The proposed changes in Union Budget 2023 may lead to a decline in the popularity of market-linked debentures

As a structured investment product, market-linked debentures (MLDs) have been a popular investment product for high net worth individuals (HNIs) seeking higher returns and tax efficiency.

However, a proposal in Union Budget 2023 to tax income from MLDs as short-term capital gains (STCG) is likely to reduce the appeal of this product among investors. Therefore, the demand for this product is expected to be low in the future.

A key question that may weigh high on investors’ minds is: What is it in the Union Budget that will make this product slightly less attractive? To comprehend this, we must examine the product’s workings and analyze how the Budget proposal will impact its returns and attractiveness.

WHAT IS AN MLD?

To understand why HNIs might avoid investing in MLDs, let’s first explore what MLDs are and how they operate. MLDs are akin to debt securities, where an investor invests a fixed amount for a specific period of time, typically between 13 and 60 months. The issuer of the MLD may have a credit rating, and ratings below AA are typically viewed as relatively high risk. Generally, MLDs have a face value of 10 lakh.

Market-linked debentures can either be principal protected or not, and they differ from traditional bonds in how they pay returns to investors.

While traditional bonds provide a fixed sum of interest, MLDs offer market-linked returns only at the time of maturity, which may be connected to various market factors such as the price of gold, 10-year bond yields, or movement in a stock index.