MLDs are structured products. Structured products are more complex than traditional fixed income investments and debt mutual funds. You should understand the product before investing.
You should clearly understand the different pay-off conditions and analyze different scenarios. You should assess what the worst case scenario is, the likelihood of the worst case scenario actually occurring and the risk-return trade-off before investing.
It is important to understand that even a principal protected MLD is not entirely risk-free. Credit risk will still apply. You should always evaluate credit risk- check the credit rating of the issuer.
MLDs of high credit quality allow you to get market linked returns (as per conditions specified by the MLD) without taking market risks.
These products are complex and suitable for experienced investors, HNIs etc.
(a) 8% annualized (XIRR) if Nifty value on Maturity > 50% of initial value of Nifty during issuance
(b) 0% if Nifty value on Maturity< 50% of initial value of Nifty
In the above example, your principal is protected. However, in some MLDs there is greater linkage with market performance and your principal is not protected.
The risk characteristics of non-principal protected MLDs are different from a pure fixed income product; they are somewhat more similar to hybrid products. Investors usually prefer principal protected MLDs, but if you want greater participation in market returns then you can invest in non-principal protected MLDs. You should invest according to your risk appetite.
MLDs are listed in stock exchanges. If you sell your MLD after 1 year from date of purchase, long term capital gains tax of 10% (plus cess and surcharge will apply). Investors in higher tax brackets prefer to sell their MLDs in the exchange just before maturity at fair values to take advantage of LTCG taxation.
If you receive maturity proceeds i.e. principal + coupon pay-off, then the pay-off will attract debt taxation. If your investment tenure is less than 3 years, then the pay-off will be added to your income is taxed as such. If your investment tenure is more than 3 years, then pay-off will be taxed at 20% after allowing for indexation benefits.