Structured Products (Market Linked Debentures (MLDs)) are tailor-made investment solutions designed specifically for investors based on their risk-return profile. The product seeks to provide better risk-adjusted returns with efficient taxation.
Structured products (MLDs) can either be 100% capital protected, partially protected or non-capital protected.
These instruments can be customized as per market view, return expectations and willingness to take risk. Structured products are linked to the underlying benchmark performances (Niy, G-sec & others) and tend to provide relative risk adjusted returns as per the objective of the structure.
Components of Structured Product
- Underlying Asset: MLDs underlying assets tend to be the debentures issued by an issuing company. These debentures can be secured or unsecured. The key risk of MLDs is the underlying assets credit risk.
- Derivatives: The derivatives component helps determine the overall risk in the product. Every strategy, from the simplest to the most complex, is based on the use of derivatives, most oen in the form of options. Most of the time it is what determines the level of risk and return. The choice of derivatives will depend on the desired risk level for the product (capital protection or not), the type of return and exposure sought and the market conditions.
- Coupon: The Coupon from the strategy depends upon the structure of the product wether it is pure debt structure, quasi debt structure or core equity structure. The coupon is always conditional and linked to underlying benchmark.
Features of Structured Products
- Tenure: Investors are required to stay invested for the tenure of the Structured Products (MLDs). Though there are MLDs which are listed but have witnessed low liquidity on exchanges. Tenure of the MLDs are customised to clients requirements.
- Diversification: Structured Products(MLDs) provide diversification across asset classes as the same can be modified for equity linked returns, debt linked returns and even commodity linked returns to choose from.
- Minimum Investment: Structured Products(MLDs) minimum ticket size varies from issuer to issuer depending upon the amount the issuer intends to raise. As these are privately placed debentures the minimum tickets ought to be around Rs.1 crore.
- Risk: The key risk for Structured Products(MLDs) remains the underlying asset credit risk. Apart from the same, the MLDs carry market risk considering their performance linked to underlying benchmark.
- Types: Structured Products (MLDs) could be principal protected, partial principal protected, or without any principal protection.