Structured Products Explained Through FAQs

Have you watched the movie The Big Short? If you have, you will know structured finance works. They are filled with complexities and were made complex. Though the film focuses on real-life housing crash in 2008, investors should understand that not all structured products were made to fall. Considering India holds the largest stock exchange in Asia, there are all kinds of products available here. The choice also includes structured products. Let us understand them through some FAQs.

What are structured products?

These are market-linked investments. Structured finance products are a mix of traditional financial instruments such as stocks and bonds with one or more elements that include derivatives. These are pre-packaged investment strategies. Some are based on options, commodities, currencies, a basket of securities, and more. Some follow different roles and responsibilities. There are no single or uniform set of standards in these packages.

So, does it mean they can be customised?

Yes. It is one of the reasons people prefer these products and are popular amongst investors who hold high-risk appetite. These investors want high returns with some control on the amount from their side since they can customise the investment package.

Who are these products for?

They are suitable for investors with a high-risk appetite. It enables them to take benefit of the rising prices and maximise gains in the sideways market because their flexibility gives them some control over these risks. Falling markets are not a concern because the underlying assets allow the investor to benefit from the failing market, for instance, foreign exchange.

What are the benefits of these products?

The best part about investing in structured investment products is that they are tax-efficient and offer access to taxable investments, enhanced returns, reduced volatility, ability to return in a flat market, protection of principal, etc.

What are the risks involved with these products?

Like other investments, investing in structured products in India includes risks as well. It is not easy to sell these products as they are not liquid. If one can sell them, it would have got sold at discounted rates. Also, the pricing of these products is gained through a best-guess approach. This increases the risk for technical investors. They are incredibly complex, and this leaves room for error. It is challenging to determine the number versus number scale between getting structured products and acquiring every element inside it individually.

How do they work?

There are two kinds of structured products – deposits and investments. The moment you buy structured deposits, the funds get locked for a specific period like five or six years. But as the product matures, you will receive a lump sum amount. Investments, on the other hand, the amount gets locked here for some time as well. Some offer lump sum at maturity depending on the performance of the product in the market.

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Created on Sep 15th 2020 02:10. Viewed 121 times.

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