MLDs – a popular structured product among rich investors till the government changed its taxation in 2023 – are structured to protect capital with Nifty exposure generating higher returns than traditional fixed income instruments. Issued by non-banking finance companies (NBFCs), it is used by them to raise funds from the market.
How it is structured
Out of every ₹100 invested, ₹80 will be invested in the bonds of the issuer (in this case InCred Financial). This will protect the capital. The rest of the ₹20 will be invested in Nifty call options – an equity derivative that bets on Nifty rising in value. If Nifty 50 moves as expected, the derivatives exposure can rise up to ₹ 33 over the next 26 months. If it does not, the value can become zero in this period. At the end of the tenure, an investor will get between ₹100 (capital) to ₹133 (₹100 + ₹33(profit)), which translates into an annualised return of as much as 14.05%. The product will work for an investor who is uncertain about the stock market prospects after the 24% run-up in Nifty in the past year.
“The ticket size which was earlier ₹10 lakhs has been cut to ₹1 lakh, which will attract a whole set of new investors,” says Vijay Kuppa, CEO, Incred Money. Kuppa said it is a good diversifier for retail investors, who are looking for equity market exposure with a layer of protection.
The structure works in such a way that if Nifty falls below 22,000, investors will only get their principal or ₹100 back. The index closed at 22,040.70 on Friday.
If Nifty remains between 23,000 and 27,500, investors will get ₹109-Rs 133. In the event Nifty reaches 27,500 and above, which is 25% from the current levels, an investor will get ₹133.
Not For All
Financial planners say investors must, however, resist from going overboard while investing in such products. The credit worthiness of the MLD-issuing NBFC is the key while deciding whether to invest.
Also, MLDs – primarily a debt oriented product – are taxed like any other debt product. They lost their popularity among rich investors after the government in the 2023 Union Budget put a higher tax on these structured products, resulting in them losing their advantage over other debt instruments. Short-term capital gains tax on debt instruments for individuals in the highest tax bracket is 30%. “Due to the change in taxation, the product has lost its relevance for rich investors and family offices,” said Nirav Karkera, head of research, Fisdom.
