Structured Products have different characteristics and elements, such as:
- Bonds:Within Structured Products, bonds ensure capital preservation, with the issuer committing to repay the capital.
- Derivative instruments: The use of derivatives, including Futures, Options, and Swaps, among others, to tailor the risk-return profile according to the investor’s risk appetite.
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:
- Complex payoff structures that can be difficult to understand
- Exposure to the credit risk of the issuing institution
- Liquidity risk or limited ability to sell the product before maturity
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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