Skip to main content

Understand the concept before investing in structured products


   Also some structured products. That is how most of the conversations with investment experts end these days. Ask them for an ideal portfolio and chances are that you would hear something like a little bit of debt instruments, some equity products and, yes, you guess it, some structured products. No wonder, there are many skeptics who make fun of these products. They claim these products are designed to confuse customers and offer them the false comfort of maximum returns. Point noted, but you don't have to steer clear of these products without even trying to find out what they are all about.


Structured products are customized products that comprise various financial instruments like derivatives, stocks, bonds and debentures with different investment strategies, in one investment basket. Or, simply put, it's a pre-packaged product which invests in various underlying assets such as equity indices, stocks, commodities and interest rates. The performance of the product depends on the returns offered by these products. "Most structured products that are sold in India, have principal protection function as the key element. It simply means the full protection of principal if the investment is held till maturity. Structured products are designed to facilitate highly customized risk return objectives.


   Take a look at the example of a simple Nifty-linked capital protection structure. You are investing, say, Rs 100 in a product with a tenure of 40 months. Of this, Rs 80 is invested in debt securities, yielding a return of 6-7% per annum. Thus, over a period of 40 months, you could get Rs 20 as interest on these debt securities. Hence, this ensures that your capital of Rs 100 is protected. The balance of Rs 20 is invested in the Nifty index. If the Nifty doubles in 40 months, Rs 20 will become Rs 40. Thus the value of your Rs 100 will be Rs 140 at the end of the period, giving you an absolute return of 40%. On the other hand, if the Nifty were to fall by say 50%, then Rs 20 invested would become Rs 10, thereby giving you Rs 110 back. This strategy ensures that at any given time your capital is protected and you will get Rs 100 back at the end of 40 months.


   While this is a simple structure, more complex structures using quantitative strategies could be deployed depending on the risk profile of the investor to generate higher returns.


   Structured products are privately placed and typically offered to high net worth individuals. Structured products are issued in the form of NCDs (Non convertible debentures), whose returns are linked to an underlying stock index such as the Nifty or a basket of stocks. Sophisticated structured products, depending upon the market conditions can be specially created for a set of clients and privately placed. The ticket size generally is Rs 10 lakh upwards. Typically, these products are designed by foreign banks and a few domestic financial institutions. They are distributed by wealth management firms, typically foreign and private sector banks to their high networth clients. One product could differ from the other based on its tenure, participation rate and trigger conditions. With their popularity increasing, they are also available in the form of mutual fund products, mostly as debt schemes in the form of fixed maturity plans (FMPs).


   These products were initially offered to meet the needs of high net worth investors. However, they are now being offered to retail investors as well. The benefit of investing in these products would be that a sophisticated investor can theoretically take direct exposure in derivatives. However, the size required for direct access is not possible in most cases.


   These products were in big demand from HNIs early in 2008. But after the collapse of US investment bank Lehman Brothers, investors started fearing the issuer's ability to return the principal. This has forced banks to search for simpler and more transparent options. The market for structured products was virtually shut for a while. The renewed interest in these pre-packaged products now indicates a return of confidence in the issuers.


   According to experts, most retail investors would find it difficult to grasp the complexity of these products. These days some banks have aggressively started pushing structured products to retail investors through their broking networks. Whether retail investors adequately understand the complicated structure of these products, which often has embedded options and implicit fees, is questionable. Also, the liquidity on premature redemption is cause for worry in most structured products, including even the listed ones.


   Though most structured products offer "principal guarantee" function, which offers protection of principal if held, until maturity, there are also non-capital protected structured products, where the principal amount is not guaranteed. This exposes an investor to the risk of losing his capital. If we compare capital guaranteed structured products with FD's, mutual funds, equities, the degree of principal protection is higher in structured products and FDs. However, the liquidity is very low in structured products, though they have the potential of giving higher returns on maturity.


   Structured equity products provide higher returns to investors on their investments by adopting a view and accepting certain risks. However, these products do not talk about the credit risk involved in the debt component. Some of the structured products claim to perform across various market conditions. These products are designed in such a way that the fund can have a large cash component. If the fund manager doesn't utilize the entire fund, this will hurt the fund's performance in the longer duration.


   According to experts, the major concern with these products is the lack of rating, which makes it extremely difficult for retail investors to evaluate some structured products. The Securities and Exchange Board of India (Sebi) has asked credit rating agencies not to rate non-capital protected structured products. Without rating, it has become difficult for issuers to sell these products to investors. Structured products are not as simple as they appear. Since these schemes use a blend of investment strategies, it is difficult for most investors to understand the strategy driving the fund.


   That is why most investment experts believe that it would take a while before investors would be ready to park money in structured products. The issuers will have to strive to make it more transparent and easy to understand. On their part, investors need to satisfy themselves that they understand the product very well and it suits their investment and return objective.



Do you need structured products?


>> Just because everyone is speaking about structured products is not a valid reason for you to park your money in them


>> These products are pre-packaged products that invest in a variety of instruments in debt, equity, derivative, currency and so on


>> Though most structured products offer capital protection option, there are products that don't offer protection of capital

 

>> Try to understand the product, the strategy behind it and the risk involved before signing up for it


>> Don't take all the claims at face value, there are chances that some of the strategies may not work all the time


>> Structured products are not the panacea for all your financial troubles. It is okay to say no if you can't comprehend them.

 

Popular posts from this blog

Post Office Deposits Interest Rates

Best SIP Funds to Invest Online   SIPs are Best Investments when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich For further information on Top SIP Mutual Funds contact  Save Tax Get Rich on 94 8300 8300 OR You can write to us at Invest [at] SaveTaxGetRich [dot] Com

How Tax Deducted at Source (TDS) works?

    THE tax season is here. And if you are an employee you can't blame your employer for deducting large chunks of money from your salary towards tax deducted at source ( TDS ), which he is legally obliged to do. Your bank will also deduct some percentage from your FD interest of Rs 10,000 or more towards TDS! So what is this TDS all about? How is it computed? Are there any changes this year? Read on... What is TDS? TDS reduces your taxable income and could even provide tax relief! The TDS collections account for 40 percent of the total taxes collected in the country. As the name suggests TDS is the amount of tax that is deducted at source in certain types of income . The TDS thus collected is deposited in the Government treasury within a specified time. How is it computed? Some of the types of income where TDS is applicable include salary, interest, rental fee, interest on securities, insurance commission, dividends from shares and UTI/Mutual Funds, commission and brokerage

Modern day balanced mutual fund approach

Buy Gold Mutual Funds Invest Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Call 0 94 8300 8300 (India)   In reality, most balanced funds have a strong tilt towards equity instead of a mix of equity and debt THERE are various types of mutual funds available to investors with specific features. Often investors have a particular idea about a specific type of funds in terms of their features and risks, but that is not what is actually available. Therefore, it is necessary for an investor to understand the actual position before picking up a fund. This requires some work on the part of the investor. One example can be the situation with balanced funds. Name is not representative: One of the first things that an investor has to understand is that the name of the fund is often not representative of its investment pattern. The name often represents only the aim of the fund, and not what it actually is.

ELSS Tax Saver

ELSS Stands for Equity Linked Savings Scheme.   ELSS Fund are mutual funds with 3 years of lock in period and offer income tax benefit under section 80C. They are open ended to purchase. Not all Mutual fund Investments are eligible for tax exception. List of Tax Saving Mutual Funds   Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.   Invest Tax Saving Mutual Funds Online Tax Saving Mutual Funds Online These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)   Download Tax Saving Mutual Fund Application Forms from all AMCs Download Tax Saving Mutual Fund Applications   These Application Forms can be used for buying regular mutual funds also   Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds ) HDFC TaxSaver ICICI Prudential Tax Plan DSP BlackRock Tax Saver Fund Birla Sun Life Tax Relief '96 Reliance Tax Saver (ELSS) Fund IDF

Should you invest in tax-free infra bonds?

THOSE looking to save tax should take note of the latest buzz in the debt markets. Power Finance Corporation ( PFC ) and Housing Urban Development Corporation (Hudco) have launched bonds that will help you save more tax than your regular infrastructure bonds. Soon, IRFC and NHAI are likely to follow suit with similar bonds. KP Jeewan, general manager, debt markets, Karvy Stock Broking, says: "The coupon in these bonds are completely tax-free and those in the highest tax bracket can expect an effective yield of 10.75 per cent, compared to the 9.5 per cent a 10-year public sector bond would offer." The PFC and Hudco offerings are of 10- and 15-year tenures, with coupon rates of 7.5 and 7.75 per cent, respectively. Unlike other regular tax-free infra bonds, the tax benefits in these bonds are not capped at ` 20,000. Even besides these tax free bonds, those in the highest tax bracket have had plenty of opportunities to invest in tax saving infrastructure bonds under 80 CCF i
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now