“Diversification is a protection against ignorance. It makes little sense if you know what you're doing. - Warren Buffet”
Given the current market conditions, the general public is afraid of high volatility and uncertainty and hesitates to invest for fear of losing money. Structured products have become an effective tool for such investors in such situations, not only to provide effective investment opportunities but also to provide consistent investment options.
Structured products are bespoke investment products for building capital by investing in the market. This is a market-linked liability, most of which is invested in bonds and the rest is used to buy other underlying assets such as NIFTY, cash, and cash equivalents. It mainly consists of fixed income products and derivative products. Many products sold in India invest in NIFTY and NIFTY-based equipment. Structured products specialize in protecting capital and some offer only capital valuation, but these products are tailored to the investor's goals, so they can achieve their desired goals. Non-bank financial institutions (NBFC) usually publish these products. Anand Rathi, BNP Paribas, Edelweiss Finance & Investment Limited, and other similar companies offer organized products. Since these are based on the performance of the underlying asset, no company offers guaranteed benefits. Repayment costs 0% while GR can be 20% (for null with capital protection), but can be even higher depending on the company and circumstances. As a rule, these investments last for three years, so the investment brings real profits and the investment amount is usually around 250,000. The tax credit is the same as the product listing. Long-term income tax is levied if you hold a listed securities transaction for more than 12 months. (Usually, companies buy before the tool matures) Some products pay interest and are taxed based on the tax rate applied to the investor.
Risk Associated with Structured Products-
● The risk depends on product design and its function.
● These securities are listed but not actively traded. Therefore, there is a liquidity risk.
● If the borrower does not pay, you will lose your investment and known profits.
● If a commodity is invested in a market or other underlying asset, the return on that investment level depends on the performance of the underlying asset.
● National and international events such as elections, disasters, and economic performance can impact profits.
● Investment costs can be unclear and can be expensive.
Who should invest in Structured Products?
These products are targeted at HNI due to their large ticket size. People who can make such a large investment, in the long run, can benefit from these products. Suitable for investors looking for alternative investment products. Derivatives markets are complex, allowing investors to enter the derivatives market with the expertise of asset managers.
Example:
Say an investor makes an investment of Rs10,000 in a 40-month pre-packaged structured product. And Rs 8,000 goes into an investment-grade bond, which yields a 7-8% annual return. The remaining Rs2,000 goes into the stock indices.
The investor might earn approx Rs 2,000 in interest on underlying assets (i.e., bonds) for 40 months. In the due period, indices will have doubled, and Rs2,000 will have become Rs4,000. Therefore, her Rs10,000 will be worth Rs14,000 at the end of the maturity, providing her around 40% absolute return. As a result, the investor may rest assured that her Rs10,000 investment is safe.
On the other hand, if the indices price decline by half, her investment of Rs 2,000 would become Rs1,000, resulting in a return of 11,000. This strategy protects her capital at all times and ensures that she will receive Rs10,000 at the end of 40 months.
Types of Structured Products-
Structured products can be divided into three categories:
Structured Deposits- Investors buy underlying assets based on currency forecasts and set timeframes and premiums. It works like a deposit account, except that income depends on the market performance of the asset. As a result, interest rates fluctuate, but returns remain constant.
Structured Capital Product (protected)- These guarantee the repayment of the principal at maturity. Therefore, it protects your initial investment. Often configured as a loan from a financial institution or bank, it is solvent until the product matures. However, in rare cases, if the issuer files for bankruptcy, the investor may lose major capital.
Structured Capital at Risk Product- These are investment vehicles that offer the highest returns, but do not guarantee the repayment of capital on time. Investors can lose money in extreme market conditions. In addition, returns are affected by the performance of the underlying asset. Investors are rewarded for taking higher risks, but protecting their money is their priority.
How is it different from an equity mutual fund or a debt mutual fund?
Equity funds typically invest most of their investment in equities and equity-based products. The risk is high because there is no guarantee of capital protection. Bond funds invest in debt and have limited returns. Structured products make it possible to take advantage of the debt and derivatives markets, which offer some protection and many benefits. They offer alternative investment opportunities to those who have already allocated the required amount to equity and debt funds in their portfolio.
Structured products offer wealthy individual investors new investment opportunities. Once you have a clear understanding of these products and believe that they have the potential to diversify your portfolio and improve your portfolio's bottom line, it is well worth understanding and investing in these products. But at the same time, the investor is advised to be aware of the risks and costs involved. It is important to invest in different tools for both short-term and long-term goals so that you are financially safe, whether you have a regular source of income or not.
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