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What Are Equity-Linked Debentures?

Looking at the ups and downs in the equity market in recent past, investors have started looking for financial products which can offer them security of principal with reasonable returns. Equity-linked debentures (ELDs) are one of this kind of investment where investor get protection of capital invested with equity based returns. In simple words, ELDs offers guaranteed return of principal amount invested by the investor + equity based returns on maturity which is why ELDs are also called as capital protection funds.


ELDs works almost as fixed income products like bonds, but in case of ELDs the final payout on maturity is based on return of the equity where funds were invested during the tenure. Here equity can be a set of stocks, a basket of stocks or an equity index. The best part of investing under ELDs is it offers guaranteed protection of principal amount with equity linked returns.

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To offer capital protection to the investor, Issuer of ELDs invest a part of principal amount collected into fixed income securities like bonds and the balance is invested in call options to provide the exposure of equity or stock index. That is why ELDs are called as structured products as these are structured in such a way that it will offer 100% capital protection to the investor with exposure of equity. Which means the amount of funds invested by the investor will be returned back to the investor on maturity. Whereas return on investment is variable which depends on the performance of underlying equity.

ELDs are generally sold to High Net Worth Individuals (HNIs) by big financial institutions.

Key Points Of Equity Linked Debentures
  • Pre mature exit is not allowed. Which means investor can not withdraw his funds before maturity.
  • Listing of ELDs in exchange make it little difficult to sell or transfer and provides lesser liquidity.
  • It is a low risk option as principal amount of investor remains safe
  • Credit rating agencies rate ELDs, which help investors to choose the best on the basic of the rating given by the CRA.
  • In positive market conditions, ELDs generate higher returns than traditional Fixed Maturity plans (FMPs).

ALSO READ : Difference Between Fixed Deposit And Fixed Maturity Plan

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About the Author: Praveen Unnikrishnan

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