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Market Linked Debentures | Fixed Income | Vijay Bhambwani - YouTube
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hello friends this is vijay bambani here
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i hope you are doing very well in the
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markets and the markets are treating you
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kindly
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friends in this video i want to talk to
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you about a new instrument that is
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basically making the rounds in the fixed
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income markets and how traders and smart
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investors are really getting above
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average return from this instrument
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friends
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where i come from people in my community
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believe that any kind of risky venture
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whether it is business whether it's
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trading whether it's uh dabbling in any
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kind of financial activity
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a prudent investor or a player or a
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trader call it what you want
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will start taking risks with capital
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only
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only after he has made a portfolio of
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fixed income investments that is
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sufficient
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to basically pay for uh his living
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expenses
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if not living expenses some aggressive
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ones even go to the extent of saying
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paying for lifestyle expenses as well so
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whether it is continuing with your
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holidays or continuing with your
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lifestyle expenditure and shopping etc
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not just survival home and health
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expenses
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your portfolio should be good enough the
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fixed income portfolio should be good
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enough to allow you to survive on
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interest income alone only then you go
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out there and start taking risks in the
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market now that kind of freedom of mind
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kind of liberates the trader and starts
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to allow him to take trades
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not because of financial compulsions and
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square them up not because he needs the
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money but because the market justifies
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an exit
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so the instrument that i'm talking about
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now
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is the market linked debenture or the
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mld
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this is a unique kind of a debenture to
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the extent that
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the returns
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are not fixed they are not known to you
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and there's a reason please bear with me
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the reason why the returns are not known
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to you because they are linked to a
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certain event occurring
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so for example uh you would have a
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dementia which is linked to the nifty
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and the underlying instrument and
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the uh the yield would be say 75 of all
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gains made in the nifty for the period
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that you held the debenture so for
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example if the dementia was for a period
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of five years and the nifty rose hundred
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percent in that five years your yield
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would be 75
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of the nifty's gains which was which
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gained hundred percent so you would make
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75 return over a five-year period
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because you were to get 75 of the gains
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of the nifty now what happens
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in the counter example
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what happens if the nifty fell
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so would certain amount of your capital
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be taken away from you no the answer is
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no
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in that case
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there would be something called the pp
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clause the principal protection clause
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which would come in in that case you
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would not receive any kind of interest
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or return on your investment but you
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would get your capital back
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just as it was
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so to that extent there is a safety net
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now
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why would somebody want to link a why
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would somebody want to invest in a
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debenture link to nifty is something
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that you would as a fixed income
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investor ask
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so the point is that do not invest in
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any such mld or market linked debenture
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which is
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linked to equity indices or equity
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shares
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the best thing to do is therefore to go
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in for those debentures which are linked
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to government bonds for example the
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10-year benchmark government bond is a
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good place to
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park your money
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now a few points about this debenture
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typically speaking the tenure of these
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mlds or market link debentures starts
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from 13 months because it has to be more
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than 12 months to be able to uh be
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eligible for long-term cap gains
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so it starts from 13 months and can go
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all the way up to 60 months
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the face value typically of these
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debentures is 10 lakhs although it is
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not a hard and fast rule
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in the example that i'm about to share
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with you of rural electrification
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corporation
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the the mld was issued on 8th of july
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2020
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the maturity was on 31st july
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2023 which is still in the future
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the underlying uh instrument that the
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debentures yield was linked to was the
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government of india 6.45
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bond which was maturing in 2029
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the trigger for determining the yield
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was 50 of the government of india bond
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yield so if the yield which was
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originally at issue price at 6.45
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fell below 50
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of that which means
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3.22 percent if the yield fell below
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3.22
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you would not receive any kind of return
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on that debenture
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but
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if it stayed above that you would get
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the 75 percent of the yield on this
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government of india uh
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2029 bond now
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since it is a government of india's
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sovereign rated bond the yield is
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unlikely to
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kind of
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fall by 50 or more so to that extent
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you're more or less protected
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and
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the beauty of
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this
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mld or the market link debenture is
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that there is a long-term capital gain
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tax
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protection
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so if you were to hold this debenture
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for 12 months or more which is why i
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told you typically mlds are issued at 13
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months or higher so if you were to hold
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this debenture for 12 months or more and
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then sell it in the secondary market
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this is very very critical if you were
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to only sell it in the capital market in
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the secondary market
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the price that you would realize would
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obviously be higher than the issue price
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because accumulated interest would have
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come in remember that this debenture
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does not pay you any regular interest
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interest is determined only at the
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end or at maturity because that's when
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the dementia issuer determines whether
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the yield of the underlying has been up
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or down
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so assuming that
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the underlying instrument yield is not
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gone to zero and therefore you only uh
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you're not going to get only your
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principal but there is some profit left
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the value of that debenture would be
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higher the price of that debenture would
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be higher since you held it for more
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than 12 months 10
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of your capital gains will be taxed only
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so to that extent it actually makes
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sense not to hold it till maturity and
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pay tax on the dementia yields but to
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sell it a couple of days before the
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debenture is due for redemption in the
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secondary market and pay nothing more
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than 10
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of the capital gains
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on the entire transaction or maybe even
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six months before maturity because you
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need actually a buyer who would want to
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wait uh for six months to get a little
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bit of profit on his investment maybe
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two or three days before maturity there
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may not be a liquid market or a buyer at
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all so to that extent the one thing that
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you must be very careful about is never
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ever invest in a market linked debenture
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which is going to be unlisted
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only invest money which is
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invest in those mlds or market linked
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debentures which have a listing option
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and
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do not invest money in debentures which
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are going to be equity linked if uh
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there are any investors out there who've
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spent long enough time in the markets
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they will instantly identify with what
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i'm saying
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if the 2000 and 2008 experience of
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ulips or unique linked insurance plans
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is any indications
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people did not know that they were
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investing in instruments that were
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linked to equity returns
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all right they thought they were buying
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regular insurance products but because
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the markets collapsed in 2008 to their
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horror when they went to redeem the ul
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ips they actually got money less than
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their principle yes less than their
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principle because the markets had
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collapsed so if you if you are a fixed
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income investor you would not want to
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link
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your returns to the performance of any
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equity benchmark index
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therefore i think the government of
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india sovereign bond would be a better
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anchor to link those debentures too
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i think there are a whole lot more uh
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issuers like the rural electrification
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corporation who are going to come out
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here remember this is a time when public
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issues of companies offering so many
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equity offerings are abound it's only a
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matter of time before companies start
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issuing mlds or market linked debentures
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left right and center pick the right
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product and get above average returns
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and get away with paying nothing more
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than 10
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capital gains on your investment
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on this cheerful note my friends i wish
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i'd been goodbye to you i wish you have
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a very very profitable time in the
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markets but not before reminding you to
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click like on this video if you liked
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what you saw
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to your feedback help me reach out to
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by referring my video to your family and
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friends
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thank you for your patience and watching
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my video this is vijay bambani logging
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off for now till we meet again in my
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next take care bye
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