Market-linked return instruments
Also written Market linked returns · Market-linked return instrument · Market-linked instruments · Variable return instruments
Investments whose return is not known in advance because it depends on the issuer's performance and on market prices — equity shares, mutual funds and listed bonds, in the workbook's own list.
In plain language
Some investments tell you the rate on the day you buy. Others do not.
A market-linked return instrument is one of the second kind. Its return depends on how the issuer performs and on what the market will pay for it. Nobody can print the number in advance.
The workbook names three examples: equity shares, mutual funds, and listed bonds traded on stock exchanges.
The return comes from two places. There may be periodic income — interest, or a dividend. There may also be a gain or a loss when the price moves. Add the two together and you have the total return. Either part can disappoint.
So why hold them at all? Because over a long period they are the workbook's answer to inflation. Fixed returns are predictable and often too small to beat rising prices. Market-linked returns are bumpy and, given time, larger.
How it works
Section 1.2.4 sets market-linked instruments against fixed and guaranteed ones across nine heads. The contrast is what gets examined:
| Basis | Fixed / guaranteed | Market-linked |
|---|---|---|
| Examples | Bank fixed deposits; small savings schemes such as NSC and post office time deposits | Equity shares, mutual funds, listed bonds traded on stock exchanges |
| Rate of return | Known at the time of investment, or reset periodically | Not known in advance |
| Source of return | Interest income only; no appreciation in the original investment | Periodic income plus capital gains or losses |
| Predictability | High | Low |
| Volatility | Little to none | Can be significant, particularly over the short term |
| Risk to capital | Low — principal generally protected | Present — value invested can fall |
| Effect of holding period | Limited relevance, since the return is fixed for the tenor | A long enough holding period, with proper selection and diversification, can reduce the impact of volatility |
| Monitoring | Minimal, once invested | Ongoing, with the option to switch out |
| Best suited for | Goals needing predictability or capital safety, or a short horizon | Goals with a long horizon, where beating inflation matters more than short-term stability |
Two mechanisms sit underneath. Dividends are discretionary — they depend on the profitability of the business and on the board's decision to pay. Prices move with expectations — a share reprices on every change in the market's view of the business, and a listed bond reprices when market interest rates move.
The workbook is explicit that the volatility is a short-term phenomenon that a long holding period can manage, and equally explicit that market-linked holdings must be monitored for signs of possible underperformance, with a switch made if needed to reduce the risk of losing the capital invested.
A worked example
Mrs Nair, 34, splits Rs 4,00,000 of retirement savings two ways and holds both for a year.
The fixed leg. Rs 2,00,000 in a bank fixed deposit at 7 percent. She knows on day one that she will receive Rs 14,000 of interest and Rs 2,00,000 of principal. Nothing that happens in the market changes it.
The market-linked leg. Rs 2,00,000 into an equity mutual fund at a NAV of Rs 250, so 800 units. She is told nothing about the return.
A year later, three possible outcomes:
| NAV after a year | Value of 800 units | Return |
|---|---|---|
| Rs 290 | Rs 2,32,000 | +16 percent |
| Rs 250 | Rs 2,00,000 | 0 percent |
| Rs 215 | Rs 1,72,000 | minus 14 percent |
The fixed leg produced Rs 14,000 in every one of those three worlds. The market-linked leg produced anything from a Rs 32,000 gain to a Rs 28,000 loss.
Now stretch the horizon. If inflation runs at 6 percent, the fixed leg's real return is about 1 percent a year, and the workbook warns it can even be negative. That is the trade Mrs Nair is making: she accepts the middle column and the bottom column on part of her money, because 25 years of a 1 percent real return will not build a retirement corpus.
Why NISM asks about it
Chapter 1, section 1.2.4 (Market-linked Returns versus Fixed Returns), builds the full comparison table and is one of the most reliably examined pages in the chapter, because a table of nine contrasted rows is easy to set a question on.
Expect a which of these is a market-linked return instrument question with a bank fixed deposit or an NSC among the options, and a source of return question — interest only for a fixed instrument, periodic income plus capital gains or losses for a market-linked one. The reasoning question is why a long holding period matters for a market-linked instrument and barely matters for a fixed one.
Common exam traps
- A listed bond is market-linked, even though it pays a fixed coupon. The coupon is fixed; the price on the exchange is not, so the total return is not known in advance. Candidates read "bond" and answer "fixed".
- Small savings schemes are on the fixed side, not the market-linked side, even though their rates are reset. That is the reset-linked sub-case, and the workbook keeps it in the fixed column.
- No appreciation in a pure fixed-return instrument. The workbook says the interest income is the only source of return, so an answer that adds capital gains to a bank fixed deposit is wrong.
- A dividend is not guaranteed. It depends on the business and on a board decision, which is precisely why equity sits on this side of the table.
- A long holding period reduces the impact of volatility; it does not remove the risk to capital. The workbook pairs the long horizon with proper selection and diversification, not with a promise.
- Market-linked holdings need ongoing monitoring. "Buy and forget" is the fixed-return answer, not this one.
Where this is taught
Free preparation for NISM Series XVIIRelated terms
- Inflation riskThe risk that the money an investment pays out will be worth less in goods and services than expected, because prices have risen — highest in fixed-return products and most damaging to retirees.
- Real rate of returnThe return on an investment after the effect of inflation has been removed — what the money actually buys more of, as against the nominal percentage the product advertises.
- Equity mutual fundA mutual fund that invests in shares to pursue growth, professionally managed and diversified across large, mid or small caps, sectors and investment styles.
- Negative real returnA return that looks positive on the statement but sits below the inflation rate, so the money buys less than it did before — the case the workbook flags when it says a real rate can be negative.
- Reset-linked instrumentsDeposits and certificates whose interest rate is not fixed for the whole tenor but re-fixed at intervals to reflect current market rates — the small savings schemes, which the workbook resets every quarter.
- Total returnThe whole return on an investment for a period: periodic income such as interest, dividend or rent plus the gain or loss in the value of the investment itself.
- Periodic investingBuilding a holding in a volatile asset through small regular instalments rather than one lump sum, so more units are bought when prices are low and the average cost falls.
- RBI Retail Direct SchemeThe RBI facility launched on 12 November 2021 that lets a resident individual open a Retail Direct Gilt account with the RBI itself, free of cost, and buy government securities without going through a bank.