HNIs buy Nifty-linked debentures worth Rs 200-300 crore every month

MUMBAI: A favourite product of the bull market has made a comeback as well-heeled investors buy structured products linked to Nifty movements.

As Nifty crosses the 8000-mark, Nifty-linked debentures (NLDs) worth Rs 200 crore to Rs 300 crore are being lapped by high net worth individuals every month.

At present, NLDs of Rs 10,000 crore are being held by such investors who are serviced by private wealth arms of banks and brokerages. NLDs come in two flavours: with capital protection (where the invested corpus is not eroded) and the riskier one with no capital protection (that captures higher return when the market surges but can wipe out the capital if there is a crash).

“Investors who want exposure to equities but avoid the downside risk opt for structures that offer capital protection. Investors looking for high participation in Nifty, invest in structures with no capital protection. Fixed income investors, too, can invest in structures with appropriate pay-offs,” says Ashish Kehair, head private wealth at ICICI Securities.

With a minimum investment ticket size of Rs 10 lakh, the space primarily belongs to rich investors who snoop around for fancy products beyond the plain vanilla. Those looking for capital protection, typically put money in threeyear NLDs that offer 1.4 times the point to point return generated by Nifty at the end of the tenure.

So, if the index rises 70% in three years, an investor walks away with an interest of Rs 9.8 lakh (1.4 times of 70%) besides getting back the capital of Rs 10 lakh. This is the maximum s/he receives even if the Nifty rises beyond 70%. If at the end of three years, the Nifty is below the level it was when the product was sold, the investor only gets back the capital. Risk takers prefer more aggressive structures.

One of the products they buy entails doubling of capital if the Nifty gives at least 25% point-to-point return after three years; if Nifty rises less than 25%, the product matches the Nifty return, but if the index slips 10% or 20% or 25%, the investor not only foregoes the interest amount but also ends up losing a proportionate part of the capital. This is a more risky variety that’s sold as “no capital protection NLDs”.

Issuers construct such risk-return matrix through complex options trading. “Investors are taking credit risk when they invest in such structures,” says Feroze Azeez, director — private wealth management — Anand Rathi Financial Services. Most issuers of these products are non-banking financial institutions and investors are effectively lending money to them. If the issuers go bust, then the investor stands to lose money.



Citi, Reliance Capital, Edelweiss, Anand Rathi Financial Services issue these NLDs. Wealth managers advise investors to put in money only if they can stay invested till maturity due to secondary market illiquidity.

“One can invest up to 20% of his fixed income allocation in principal protected structures. Non-principal protected structures, offering high participation, can be considered up to 20% of the equity allocation,” says Nishant Agarwal, senior director & head — wealth advisory solutions, ASK Wealth Advisors.

They also remind clients of the tax angle in NLDs. Capital guarantee products are listed on the exchange and, therefore, attract 10% tax if they are sold after 12 months, but before maturity of the structure.

However, if investors hold NLDs till maturity, the gains are taxed as interest income. In case of unlisted products with a tenure of over three years, gains are taxed at 20%, otherwise it is taxed at the marginal rate of tax. Most NLDs come with an entry load of 2-3% which is used to compensate wealth managers marketing them.