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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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What are Structured Products?
Structured products are investment vehicles that allow investors to indirectly take advantage of current market trends and experience huge financial gains. They are highly customised for the benefit of high net worth investors, though imbibe many risks along. These are complex products and high net worth investors favour them for various reasons. They can be divided into four types.
1. Capital Preservation
With these, you get a partial participation at the time of maturity. The returns are based on a recurring or even a one-time payment post the expiration. These products are structured as loans to financial institution or a bank. The returns gained from the plan depend majorly on the market standing of the said bank or financial institution. If you are an investor who is against taking too high a risk, then this is the product for you. Though, credit risk is still a factor you may want to carefully consider.
2. Yield Enhancement
You will hardly find great returns from these products as they have a fixed coupon format. However, investors are known to opt for multiple yield enhancement structured products to benefit from a recurring or one-time payment, after their maturity. The underlying assets generally comprise of stocks or stock indices. However, it is better to opt for indices instead of single stocks as records suggest that the worst-of feature priced on single stocks does not provide compensation to the investor on taking the risk of having that stock delivered.
3. Participation
Apart from credit risk being an important aspect, participation products are not leveraged. They track the performance through several underlying assets that leads to diversification. However, the current market conditions should be considered before opting for multi-asset diversification and reduce risks. to diversification of your investment in them.
4. Leverage
This is a simpler product where you gain huge profits through a small investment. The risk factor is higher than the other products. Hence, it is advisable to consider such option only if you have the knowledge to deal with the risks or if you have a great investment banker to guide you through. You may then hedge your other investments through leveraged products.
Related Risks
Just like there is a disclaimer at the end of every financial commercial, here's one for structured products. After all, nothing great comes devoid of risks. The biggest risks you would face are market risk, credit risk, currency risk and lack of liquidity.
Understand that even if you are promised a 120% participation in the market for returns, it won’t be the same in a volatile market. Your returns will then be restricted only to a certain position of the market. After a certain point, these returns may be limited or there may even be a chance of you not receiving any upside participation in the specified period.
You also have to keep a check on how well these structures are distributed. The first 70-80% are generally invested in fixed income and the remaining funds in derivatives. More often than not, the fixed income part is invested into corporate bonds and you must ensure that these bonds have investment-grade ratings. You also have the option to choose a structured product that’s rated by a credit rating agency. Since the risks involved are higher, pick a product with a high rating.
Bottom line
These unique products are a popular choice of high net worth individuals who don’t mind a few risks attached to their investments. Nonetheless, the risks are on an upscale considering the global economic conditions and a lack of liquidity. Having a good investment banker by your side in such conditions can prove to be a blessing. You can leave the planning and strategizing aspects to him/her while your returns keep coming in.
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