What are Structured Products and their Types?
Reading Time: 5 minutes
Key Takeaways: Structured products are financial instruments whose asset allocations include both volatile and secure investments. The risk is managed with the use of derivatives. Structured products are customisable investment options that cater to the specific needs of an investor. In this article, we understand what are structured products and the benefits of structured products in detail.
The investment market is rife with a myriad of options. If you are a novice, you will be overwhelmed to see how many options are available. Indeed, it can be quite confusing to choose the best investments to help you earn high returns without risking your capital investment amount. While all stock market investments involve some level of risk, you can invest in structured products to reduce your risk levels. To know more about what are structured products, and the types and benefits of structured products, keep reading this article.
What are Structured Products?
One of the most favoured contemporary investment options, structured products are hybrid investment avenues that focus on maximising returns through investments in various components of the market structure. These financial instruments are designed uniquely to provide you with returns according to your specific needs. A structured product is essentially a customised financial instrument that utilises various investment avenues and combines them in a package. The risk factors and the return objectives of structured products are not fixed and can vary per the needs of the investor.
Structured products utilise traditional underlying assets, but the returns from the underlying assets are swapped with derivatives. Usually, structured products combine different asset classes to create a mixed investment portfolio. A structured product balances the risks it undertakes by including secure investments as part of the portfolio.
Components of Structured Products
Structured products comprise of three essential components:
Bonds are a vital part of structured products, which makes them a secure investment option. Investing in bonds helps with capital protection, thereby ensuring you recoup your entire capital investment amount. Even if the underlying assets of the structured product does not perform well, you will get back your principal investment amount.
Equities and equity-oriented schemes are also classified as structured products. There might be a single equity investment or a set of equity investments under structural products. These equities help maximise your returns but are typically riskier instruments that perform based on market volatility.
A derivative is an investment instrument whose value is determined based upon the values of the underlying assets (1). Derivatives act as the determinant of the overall risk involved in a structured product. Derivatives help customise the returns from the underlying assets to meet the unique requirements of the investors.
Features of Structured Products
Are structured products a good investment? Consider these features to decide.
A structured product instantly boosts your investment portfolio. There are various financial instruments involved in creating a structured product. Structured products include bonds, equities, and derivatives as the principal assets. Bonds and equities together generate returns which makes structured products great investment options.
A structured product is an excellent option if you are looking for a high-value investment. In India, the minimum value of a structured product investment is INR 10 lakhs(2). The value of a structured investment differs according to the offer of the issuer or the requirements of an investor. If you invest through a Portfolio Management Service, the minimum investment amount in a structured product is INR 25 lakhs(3).
Risks and return
Risks and returns are evaluated very carefully when creating a structured product. The aggressiveness or the conservativeness of a structured product will be dependent on your requirements. However, a structured product is suitable for both conservative and aggressive investors as both investments are involved in the creation of a structured product. Bonds provide financial security, and equities generate dynamic returns.
Structured products cannot be liquefied before a fixed period. All structured products are fixed period investments as the involved investments require a specific tenure to deliver the promised returns. The tenure of structured products ranges from 12 to 36 months(4).
Handled by finance managers
Since structured products involve high-value investments, they have a complex mechanism in place. Experienced fund managers or investment portfolio managers create structured products to cater to your needs. Professional involvement in the management of these instruments helps in minimising any risks and achieving your investment goals.
For safe and seamless online investments in India, choose Asia's Safest Bank.
How Do Structured Products Work?
While investing in structured products, fund managers allocate assets in different investments instruments, as mentioned earlier. The idea is to combine instruments that offer financial security (Bonds), along with instruments that invest in stock indexes and/or foreign currencies (Equities) and combine them with securities that handle the overall risk involved in the structured product (derivatives).
Let us assume that you invest INR 2,000 in a structured product for three years, providing capital protection. This means that you will receive your initial investment amount of INR 2,000 after 3 years.
The fund manager will invest INR 1,600 in a fixed income instrument which guarantees a net return of INR 2,000 after 3 years. This secures your initial investment.
The remaining INR 400 is invested in equities and derivatives to generate higher returns on your investment. The returns are never guaranteed as it depends upon the performance of the equities in the market. A positive performance offers you greater returns at the end of your investment period. Even if the equities do not perform positively, your initial investment stays secure.
Types of Structured Products in India
Conservative structured products
These are structured products that ensure that you will receive the initial investment in the instrument even if the equities of the product do not perform favourably. These structured products come with the assurance of capital protection. The returns from equities are relatively lower since most of the assets are allocated towards bonds or debts.
Aggressive structured products
Aggressive structured products do not assure the returns on your initial investment. Risks are very high on these financial instruments, but you can earn high returns on maturity. These products do not offer capital protection.
Benefits of Structured Products
Here are some benefits of structured products which make it a good investment option.
- Structured products are carefully created financial instruments that help diversify your investment portfolio.
- You can customise your investment portfolio by selecting your preferred structured products.
- You can fulfil different financial goals, e.g., growth or income, through diversified asset allocation.
- You can protect your investment if you opt for a product offering capital protection.
- You can generate stable to high returns due to the combination of assets like equities, bonds, and derivatives.
Conclusion: Now that you know what are structured products, you can consider investing in them. With investments in varied structured products, you can ensure you create an all-encompassing, versatile investment portfolio. You can reduce the risks of market volatility with secure investments in bonds. With a structured product, you can invest in even the most volatile markets and not suffer losses on your investments.
Interested in more investment opportunities? Choose Asia's Safest Bank.
*Disclaimer: This article is published purely from an information perspective and it should not be deduced that the offering is available from DBS Bank India Limited or in partnership with any of its channel partners.
The purpose of this blog is not to provide advice but to provide information. Sound professional advice should be taken before making any investment decisions. The bank will not be responsible for any tax loss/other loss suffered by a person acting on the above.