Market Linked Debentures (MLDs) have become increasingly popular in recent years, attracting investors with promises of high returns while keeping their principal safe. However, investors should beware of the risks associated with these securities, which are often misunderstood and misrepresented.
What are Market Linked Debentures (MLDs)?
Market Linked Debentures (MLDs) are a type of debt security that combines the features of traditional fixed income securities, such as government bonds, with the potential for higher returns linked to the performance of a specific market index, such as the stock market. MLDs typically have a fixed maturity date and a fixed coupon rate, but the principal repayment is linked to the performance of the underlying market index.
Why are MLDs popular?
MLDs have become popular because they offer the potential for higher returns than traditional fixed income securities, while still providing some degree of principal protection. They are also marketed as a way to diversify an investor’s portfolio, as they can provide exposure to different markets and asset classes.
What are the risks associated with MLDs?
While MLDs may seem like an attractive investment option, they come with risks that investors should be aware of. One of the main risks is that the principal repayment is linked to the performance of the underlying market index, which can be volatile and unpredictable. If the index performs poorly, investors may receive less than their initial investment.
Another risk associated with MLDs is the complexity of the product. MLDs are often marketed as simple and easy to understand, but they can be difficult to fully comprehend. Investors may not fully understand the risks associated with the underlying market index or the terms of the security, which can lead to unexpected losses.
Finally, MLDs may have high fees and expenses associated with them. These costs can reduce the potential returns of the investment and eat into the principal amount.
Market Linked Debentures (MLDs) may seem like an attractive investment option, but investors should carefully consider the risks associated with these securities before investing. While MLDs can offer the potential for higher returns and diversification, they also come with risks that can result in unexpected losses. It is important to thoroughly research and understand any investment product before making a decision.