Structured Products are made to achieve certain risk-return goals. These goals are accomplished by taking conventional underlying assets and substituting non-traditional payoffs from other underlying assets for their customary returns. The returns from structured products are fundamentally connected to conventional returns from underlying assets. To leverage greater involvement in case of an upside or a loss, they are combined with swaps, futures, and other derivative instruments. Structured products give investors the freedom to select a tailored reward that often combines fixed and variable market-linked returns over the course of the investment, helping them to achieve their own risk-return objectives while effectively budgeting their taxes.
Features of Structured Products
- Tenure: These products are usually long-term in nature requiring a lock-in of at least 12 months and an investment horizon of 2-3 years to gain maximum returns.
- Fees: Like any professionally managed financial instrument, structured products also attract fees that could vary.
- A mix of conventional instruments: A structured product is always an amalgamation of multiple financial instruments integrated to achieve a pre-determined goal.
- Ticket Size: Structured products require a minimum investment of Rs 10 lakhs by an investor if invested directly. The ticket size will vary across issuers. If the investor invests through PMS route, the minimum ticket size is Rs. 25 Lakhs under PMS guidelines in India.
- Risk: The structure of the product has no bearing on how risky it is. Depending on your preferences, it might be conservative or aggressive.
- Types: Structured products can be completely, partially, or without any main protection investments protected.
- Complex Instruments: Keep in mind the complexity of Structured Products. They combine several risk-bearing tools, such as derivatives. You must be aware of the investment’s inherent dangers as an investor.
Structured products are not liquid, in contrast to other liquid instruments. They are not traded on the secondary market and are therefore not liquid due to their inherent characteristics. In the event of an emergency, you should have available funds without having to rely on your investments in structured goods. You should plan to keep the structure until it matures as an investor.
- Risk Tolerance: Prior to investing in structured products, you should evaluate your degree of risk tolerance and the amount of money you are willing to lose. Are you reliant on the income from structured products, or are you merely reaping the benefits of the upswing?
- Credit Risk: The issuer of the underlying debenture’s credit risk will determine whether or not the principal will be returned in full at maturity. A number of micro and macroeconomic factors, like GDP growth, business cycles, liquidity, etc., are related to the total demand for the Issuer’s products. Any negative change in these variables will have a negative effect on the issuer’s operations and ultimately on its credit profile.