A structured product refers to an investment item whose performance, value and return are linked to an underlying asset. Structured products are two or more assets related by an interest rate and derivatives.
Structured products are investment assets that give the investor an additional return other than the initial investment. Structured products aim to return the initial amount invested (principal) and a profit to the investor. This investment strategy involves taking on more risk and earning more than investing in a traditional finance model would give.
Structured products are classified as non-traditional investment products. This is because structured products combine with an underlying asset to make profit.
Structured products feature traditional financial items, such as investment-grade bonds, equities, options, indices, commodities, and so on, in addition to non-traditional payoffs.
A bank or a financial institution usually issues structured products to individuals. This is because of the need to create cheap debt. Structured products involve retail investors investing a small portion of the principal in underlying assets. They then earn fixed or variable profit from price movements.
Structured products are meant to provide more customized options to retail investors. These investment products are unique because they involve an asset that is linked to underlying assets. They are linked to interest in addition to single or multiple derivatives. These underlying assets give the investor a variety of options in terms of risk and return levels.
Characteristics of Structured Products
Structured products have been described as investment assets linked to underlying assets or securities.
Here are some characteristics of structured products:
- They serve as a replacement for direct investments.
- Retail investors have access to them.
- The date of maturity is defined and so is the payoff.
- The return of structured products are dependent on the performance of the underlying assets.
- Structured products protect the principal capital invested as long as the investment is held until full maturity.
- They serve as a platform for creating customized investment options to investors in terms of risk-return goals.
- They are investments that reduce the risks of loss.
What does a structured product consultant do?
A structured product consultant is a professional with the necessary expertise to provide consulting services, guidance and advice to investors looking to invest in a structured product.
Some of the duties of a structured product consultant are:
- Provide consulting services to investors
- Advise investors on the structured product that best suits their financial needs
- Guide investors through the process of buying into and maintaining a structured product until maturity
- Monitoring market conditions to protect the investor’s assets
Components of Structured Products
Structured products feature traditional financial instruments, such as bonds, banknotes and CDs. The underlying assets, securities and derivatives linked to these investments vary based on what an individual wants to invest in.
A structured product has three components. These components make up a structured product. They are:
- A bond, banknote or CD
- The underlying assets
- The derivative
These components determine how the structured product will function and the return the investor will get from the product when it has reached its maturity date.
- A bond, bank note or CD
The bond component is what funds the derivative. The interest gotten from the bond is used to buy into the derivative. It also provides the capital guarantee that, at maturity, the investor is guaranteed to get their money back from the issuer unless the issuer defaults on payment.
- The underlying assets
Underlying assets are usually traditional financial instruments, such as an index fund, exchange-traded funds or any other security available for trading on the market.
This component involves the process whereby a product returns the initial amount invested (principal) at maturity in addition with interest earned from the underlying asset.
- The derivative
The derivative component is a very important component of structured products. It is linked to the underlying asset after purchase. Derivatives could be options or forward contracts. Derivatives are most used in the form of options.
The derivative component, in most cases, determines the amount of return gotten from the investment. When choosing a derivative, the investor considers market conditions, the expected return and the presence or absence of capital protection.
Types of Structured Products
There are three types of structured products. These categories of structured products differ based on the returns earned, principal protection and risk levels.
The types of structured products are:
- Structured Deposits
Structured deposits involve fixed or variable returns depending on the performance of the underlying assets. For example, an individual who buys an underlying asset in the foreign exchange structure. The investor’s earnings depend on market conditions and the market performance of the asset.
- Structured Capital Products
Structured capital products protect the principal invested by an individual. It guarantees the protection and return of the initial amount invested. But in rare cases, the investor might lose his principal capital if the issuer claims to be bankrupt.
- Structured Capital At Risk Products
This category yields the most return but involves more risks. It doesn’t protect the investor’s capital as the investor can lose money due to extreme market conditions. The returns are dependent on the performance of the underlying assets.
Benefits of Structured Products
- Investment products are customized to meet the differing financial needs of different investors.
- It can protect the principal capital of the investor.
- It can provide good returns on investment.
- Structured products can provide larger returns than the investor would’ve gotten from the underlying assets.
- Because structured products can protect the original amount the investor put in, they can also serve as a method of saving with the possibility of profit.
- Investors can enjoy variety and diversification in the assets they are able to invest in.
- Structured products have low volatility.
Risks of Structured Products
- It can lead to loss of capital.
- There is little to no liquidity present in structured products.
- It is a complex investment that can lead to unknown risks.
- It can be costly.
