Structured Investment Products

Over the past few years, Structured Investment Products have garnered immense popularity among investors of all types, especially those looking to invest in instruments that align with their own risk and return preference. These products pool together different assets or asset classes to meet specific investment needs, and they come with distinctive benefits and risks.

This article will cover the meaning of structured investment products, their composition and benefits, and points to consider for investors. Having the knowledge of structured investment products permits you to make better decisions and adequately diversify your portfolio.

What is a Structured Investment Product (SIP)?

A structured investment product is a basket that contains a combination of assets, including derivatives, bonds, equities, or other securities packaged into one financial product. These tailored products come with specific objectives like capital protection, increasing income, or accelerating returns. Structured investment products offer a technique of designing specific solutions that vary as per the risk-bearing capability of an investor and their market outlook, with a focus on their investment horizon. Investors in SIPs benefit from a number of features unique to them, making them attractive for both retail and institutional investors.

Also read: What Is Lumpsum Investment

Understanding structured investment products with an example

To better understand structured investment products, take an example of a capital-protected note. An instance of this could be investing in a zero-coupon bond and an equity option through a SIP. The principal amount is protected, which means that the bond is bought at a discount and will mature at its face value. At the same time, this equity option can also secure potential gains in an individual stock/index.

For example, let’s take an investor buying a structured product with a three-year maturity. The product puts 80 percent of the capital in a high-grade bond and guarantees the principal amount is secure when it matures. The remaining 20 percent is used to purchase call options on a stock index. If the index goes up, the investor makes a profit. If the index underperforms, thanks to the bond component, they still get back at least their principal amount.

This example demonstrates the meaning of structured investment products and shows that they provide a balance between protecting capital while still getting potential returns. SIPs can be customised according to the needs of investors, both in terms of investment objectives and risk appetite, through a combination of different financial instruments.

Also read: Best Investment Strategies for New Investors

Returns from structured investment products

• Fixed returns: There are SIPs that pay fixed interest and provide an additional income regularly.

• Market-linked returns: Your returns depend on how the underlying assets, like equities or indexes, perform.

• Capital protection: Certain SIPs guarantee the principal at maturity and protect an investor's initial investment.

• Enhanced returns: SIPs can yield higher gains using diversified financial securities.

Features of SIPs

• Customisation: These products are tailored according to the needs of the investor.

• Risk management: These products provide capital protection and hedge against potential market downturns.

• Diversification: They combine different assets and asset classes.

• Market exposure: These products offer exposure to various markets and sectors.

Also read: Best Investment Plan for Monthly Income

SIPs and the Rainbow Note

A Rainbow Note is a type of SIP that offers investors exposure to a number of asset classes or indexes at the same time. For example, a Rainbow Note could offer returns that are linked to the performance of several stock indexes, commodities, and currencies. Its design ensures that the investor participates in the most successful one while comparatively reducing their exposure to those underperforming.

Investors looking for broad market exposure with low downside risk will find Rainbow Notes most favourable. These products offer flexibility and have the attribute of being structured as a customisable investment product. With the knowledge and an understanding of a structured investment product and how a Rainbow Note works, investors can consider their financial objectives and risk appetites more confidently while making decisions.

Also read: What Is Cost of investment

Pros and cons

Investors must consider the benefits and downsides associated with structured investment products.

Advantages

• One of the biggest advantages is that they offer personalised solutions for Investors. They are designed based on your investment goals and risk profiles.

• A few SIPs come with a capital protection facility, ensuring that the principal amount is returned at maturity, making it attractive to investors who prioritise safety.

• SIPs also extend diversification and invest in multiple asset classes, thus reducing the overall risk of the investment portfolio.

• SIPs can provide increased returns of regular savings products by utilising different financial instruments to maximise earnings.

Disadvantages

• These products are complex for one major reason. Given the increased level of financial literacy required, it may be difficult to understand their structure and how they operate.

• Some SIPs may also have low liquidity, which means that you will not be able to exit the investment easily should you need it suddenly.

• Market-linked SIPs may not always provide expected returns owing to market volatility.

• The high fees and charges can eat into the overall returns, making these products less attractive for some investors.

Also read: Types of SIP Investment in Mutual Funds

Examples of structured investment products

A typical structured investment product is a Dual Currency Investment (DCI). In a DCI product, you deposit money in one currency and link the returns of the same to the movement of the exchange rate of another currency. For example, a person may invest in US dollars and expect to receive profits based on the situation with the Euro versus Dollar. In such a scenario, if the Euro becomes strong, the investor will get higher returns. However, if the Euro depreciates against the Dollar, they will receive lower returns or even face losses.

Another example of this could be an ELN or Equity-Linked Note. An ELN is a bond with an embedded equity option, making it similar to holding stocks and protecting your principal amount. The investor enjoys any gains if the underlying stock performs well. If it performs badly, then the investor still receives the principal amount.

Key takeaways

• SIPs are portfolio-specific individual solutions.

• In some structured investment products, your principal amount is ensured.

• A structured investment product represents more than a single asset class.

• An SIP maximises returns with the aid of financial instruments.

Conclusion

Structured investment products are complex, flexible investments that combine multiple financial products to meet predetermined goals. In order to make informed investment decisions, investors need to know what structured investment products are and how they work. Although SIPs provide several benefits, such as customisation, capital protection, and diversification, they also carry certain risks.

If you are new to the world of investments, you can visit the Bajaj Finserv Platform to invest in mutual funds from top fund houses. You can also compare mutual funds to find mutual fund schemes that align with your investment objective. For greater convenience, you can also utilise the mutual fund calculator to predict estimated returns.