What Are The Types And Risk Involved In Market Linked Debentures

Introduction

Over the last few years, MLDs have gained attention among high-net-worth investors looking for something beyond conventional fixed-income products. Still higher return potential also comes with added complexity. 

Before investing, it's important to understand the different market linked debentures types, how they work, and the risks in MLDs.

We simplify the same through this blog; stay tuned.

What Are Market Linked Debentures (MLDs) in India?

Market linked debentures are non-convertible debentures (NCDs) whose returns are linked to the performance of a market-linked benchmark instead of paying a fixed coupon.

In simple words, MLD combines features of debt investments with market-linked returns.

For example, an MLD may be linked to the Nifty 50 Index. If the index meets certain conditions during the investment period, you receive the predefined payout. If not, your return may be lower, depending on the product's structure.

Since every MLD comes with its own payoff formula, investors should always understand how returns are calculated before investing.

How is MLD Different from Bond?

A normal bond promises a fixed interest payment. An MLD doesn't. 

The returns of market linked debentures depend on whether the linked index or market condition performs as specified when the debenture matures.

Key Types Of Market Linked Debentures Available In India

There are different market linked debentures types, and they mainly differ based on the benchmark & principal protection features.

• Equity-linked MLDs 

   These are linked to stock market indices like the Nifty 50 or Sensex. Returns depend on how the chosen index performs over the investment period.

• Commodity-linked MLDs 

   Some MLDs track commodities like gold or silver. If commodity prices move according to the product's payoff conditions, investors may receive higher returns.

• Principal-Protected MLDs 

  As the name suggests, these MLDs are structured to protect the invested principal at maturity, provided the issuer does not default. While the principal remains protected, the returns are still linked to the performance of the underlying market benchmark and may vary.

• Non-Principal Protected MLDs 

  These MLDs do not guarantee the return of your invested capital. If the linked market benchmark performs poorly or the product's payoff conditions are not met, investors may receive lower returns and, in some cases, may also lose a part of their principal. 

What Are The Key Risks Involved In Investing In Market Linked Debentures?

The biggest market linked debentures risk is that returns are uncertain. Unlike fixed deposits or traditional bonds, there is no guaranteed coupon linked to the market performance.

Here are the major risks of MLDs investors should know.

• Market Risk 

  Since returns depend on market movements, poor performance of the linked benchmark can reduce your overall returns.

• Credit Risk 

   MLDs are issued by companies. If the issuer faces financial difficulties or defaults, investors may lose part or all of their investment.

• Liquidity Risk 

   Many MLDs are not actively traded in the secondary market. Selling before maturity may not always be easy or possible at a fair price.

• Complex Product Structure 

  Every issuer has its own payoff formula. Sometimes the product looks attractive, but the return conditions are difficult to understand.

• Reinvestment Risk 

  Once the MLD matures, finding another investment with similar return potential may not always be possible.

MLD vs Debt Mutual Fund Comparison

Although both invest in debt-oriented instruments, they work very differently.

If you prefer transparency, diversification, and easier liquidity, debt mutual funds may feel more comfortable. But if you understand structured products and are willing to take additional risk for potentially higher returns, MLDs may be worth evaluating.

Current Taxation of MLDs in India

In 2026, gains from MLDs are generally taxed as short-term capital gains (STCG), irrespective of the holding period. Here, taxation depends on your income tax slab rather than the investment holding period.

This is different from the earlier tax treatment (in 2023), where long-term capital gains tax benefits were available if certain holding conditions were met.

Post-2023 Tax Rule Impact

The MLD tax changes introduced in 2023 reduced one of the biggest advantages that Market linked debentures previously enjoyed.

Earlier, investors often considered MLDs partly because of their favourable long-term capital gains treatment. After the tax rule changes, that benefit no longer applies in most cases.

As a result, investors now evaluate MLDs more on their risk-return profile and product structure rather than on tax efficiency alone.

Conclusion

Like most investments, MLDs aren't inherently good or bad. They're simply more suitable for investors who understand structured products and are comfortable with the risks that come along with them.

Remember, Market Linked Debentures can offer attractive returns, but investors should understand both the market risks and the issuer's credit quality before investing.

So, before investing, don't just look at the advertised return. Understand what benchmark the MLD is linked to, how the payoff is calculated, the issuer's credit quality, liquidity, and the current tax treatment.