A structured product is an investment that combines characteristics of traditional investments, like bonds, with traits of more complex investments, like derivatives.
As per SEBI norms, hybrid securities combine features of debt securities and exchange-traded derivatives. Derivatives are financial contracts which derive their value from the performance of an underlying asset – stocks, stock indices, etc.
Structured products allow investors to profit from asset price movements without directly owning the asset. These products incorporate derivatives to link the returns to the performance of the underlying assets.
Structured Products have different characteristics and elements, such as:
Structured products start with a base investment, like a bond that pays interest and returns the original investment at maturity.
The issuer, typically a bank or an investment firm, adds derivative “mix-ins” to modify the payoff and risk/return profile.
For example, an issuer can use derivative contracts to link some of the returns to the performance of the Nifty 50 stock index over the product’s life. If the index increases, the investor participates in those gains on top of the base bond returns. But if the index declines, the derivatives may cap or limit the losses.
Because structured products have multiple components “baked in,” they can provide customised investment outcomes aligned with an investor’s risk tolerance and goals. Risk-averse investors may want principal solid protection, while others may seek higher upside potential.
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Private banks, wealth management firms, and NBFCs offer structured products in India. These products are typically suited for high-net-worth investors seeking portfolio diversification and high returns with lower risk.
Some of the major risks associated with Structured Products are:
As is with any investment, structured products require a thorough analysis of the specific terms, risks, and whether the payoff structure suits one’s objectives and risk tolerance. While the customisable feature allows for innovative combinations, these products can involve complex, hard-to-value derivative exposures, which need careful evaluation.
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1. What is the minimum investment required for structured products in India?
The minimum investment threshold for structured products typically starts at ₹10 lakh in India.
2. How long is the lock-in period for structured products in India?
The typical lock-in period for structured products in India is at least 12 months. This makes them more suited to investors with a medium-to-long-term investment horizon of at least three years or more.
3. Who are structured products typically suited to?
Structured products are mainly suited to high-net-worth individuals and seasoned investors with a medium-to-long-term investment horizon, looking to diversify their portfolio and earn higher returns while potentially also protecting their capital.
4. Which underlying assets can structured products be linked to?
Structured products invest in a basket of assets, including individual equities, government/corporate bonds and their derivatives, depending upon their investment objectives (capital appreciation vs stable income or capital preservation), and other asset classes, including commodities and currencies.
5. What are derivatives?
Derivatives are financial instruments that derive value from an underlying asset (like stocks, bonds, commodities, currencies, or indices). They are essentially agreements between two parties based on the future value or movement of said assets without necessarily owning the asset.
They can be used to hedge against risk in one’s portfolio, attempt to profit from predicted price changes (speculation), or take advantage of price differences in assets between markets (arbitrage).
6. How does credit risk impact returns on structured products?
Investor returns on structured products are highly dependent on an issuer’s creditworthiness. If the latter defaults on payments, one may potentially lose on their principal and accrued returns, regardless of the product’s market performance.
7. What are the factors I should assess before investing in structured products?
Key factors to evaluate before investing in a structured product include suitability based on your investment horizon, financial goals and risk profile, fee structure along with associated charges, liquidity, issuer credit rating, complexity and transparency of the payoff structure, and historical performance.
8. How do market-linked debentures differ from traditional debentures?
Traditional debentures typically pay fixed interest, whereas the performance of market-linked debentures is typically tied to the performance of an underlying index, equity, debt instrument, or other such asset classes.