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Nifty-linked debentures - More hype than substance?

Structured products like Nifty-linked debentures are commonly offered to High Net Worth individuals.

Unlike conventional debentures which have fixed interest rate, these products offer returns which is linked to the performance of Nifty over the tenure of the debentures (normally 3 years).


In a typical product,
a) If the Nifty falls below the level at the time of issue, you get zero returns. In short, your capital is protected.
b) If Nifty goes above a certain pre-defined level, you get returns only up to the pre-defined level. In short, your gains are capped.
c) Within these lower and upper Nifty levels, you get returns based on how much Nifty has appreciated. 

Thus you are taking a bet on the market, but with your capital protected. However, your returns are also capped.


These debentures are issued by Non Banking Finance Companies (NBFCs). The minimum investment amount is normally Rs.10 lakhs.
 
Should you investment in them?

No, these structured products have certain disadvantages:

a) You are taking a credit risk on an NBFC. Today when many companies are facing financial stress, this is not a good idea. Even the rating of AAA does not inspire confidence. The worrying aspect is that the agents don't even disclose the name of issuer. This is the worst form of non-disclosure.

b) It is a hybrid product with investment in both debt and equity. Now, equity carries zero tax when invested independently. But here you end-up paying tax even on the gains on the equity portion. Therefore, it make ample sense to keep debt and equity separate. That is why I recommend equity and debt funds separately instead of hybrid funds like Balanced or MIP funds.


c) Here you may end-up paying around 3% as up-front fees, whereas investments in MFs carry zero entry load. This too will affect your returns.

Returns-wise these products will not outperform a well-diversified and balanced portfolio; and they carry higher risk. So such products can be avoided.

Don't miss: Many risks in Nifty-linked debentures you don't recognize

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