MLDs are structured products with debt instruments which promise returns benchmarked to some market index or basket of stocks or commodities etc. with variable capital protection.
MLDs have a high minimum ticket size (Rs. 10 lakhs as per SEBI guidelines) and are illiquid products. They are issued for a fixed term of 1-4 years and difficult to transfer before the term completion.
MLDs are generally issued by Non-Banking Financial Companies (NBFCs) to raise funds. The capital protection is achieved with debt instruments and the market benchmarked return with derivatives.
WHO SHOULD INVEST IN THEM?
As the higher ticket size suggests, these products are suitable for High Net-worth Individuals looking for market-linked returns with capital protection and are comfortable with the lack of liquidity.
It is mentioned above that MLDs offer market benchmarked return but the extent of that is defined by the Participation. Consider an example of an MLD with 150% participation with the Sensex 30. So, if the Sensex rise by 20% during the term of the MLD, then the return from the MLD will be in the range of 30%.
1. Liquidity Risk
As mentioned before, MLDs offer very limited liquidity if at all any liquidity.
2. Market Risk
Depending on the extent of capital protection, MLDs can have significant market risk.
3. Credit/Default Risk
The investor needs to be aware of the credit risk associated with the issuers. MLDs are generally issued by NBFCs who may have significant credit risks. Choosing MLDs solely based on return (yield) may not be the best idea as the high yield may be linked with the high credit risk of the issuer.