Types of structured producta
Types of Structured Products
Structured products are financial instruments that combine various elements, including bonds and derivatives, to create tailored investment solutions. They offer investors unique risk-return profiles that cater to specific market views or investment strategies. Below are some common types of structured products:
1. Equity-Linked Notes (ELNs)
ELNs are debt instruments where the return is linked to the performance of an underlying equity or equity index. These notes typically offer a fixed income component along with potential returns based on price movements of the underlying asset.
2. Market-Linked Notes (MLNs)
These are fixed-income securities with returns tied to the performance of a specific market index, commodity, or basket of assets. The return may include periodic interest payments and an additional payoff linked to the index's performance at maturity.
3. Structured Deposits
Structured deposits guarantee the return of the principal amount invested, regardless of how the underlying asset performs, at maturity. While they offer some downside protection, the upside potential is often limited compared to other structured products.
Take note that despite being a structured “deposit”, it is actually considered an investment product (and not a deposit), and the capital becomes an unsecured credit of the issuer (unlike actual, traditional deposits).
4. Yield Enhancement Products
These structured products are designed to provide higher yields compared to traditional fixed-income investments. They often involve strategies such as selling call options on underlying assets to generate additional income, with the trade-off being a capped upside potential.
5. Buffered Notes
Buffered notes offer a degree of downside protection against an underlying asset’s decline, while enabling investors to participate in some upside potential. The buffer defines the range of loss that investors can absorb before experiencing any deduction of principal.
6. Reverse Convertibles
These structured products provide high coupon payments, but they come with the risk that the principal may be converted into the underlying asset if its price falls below a predefined level. They are typically linked to equities or equity indices.
7. Credit-Linked Notes
Credit-linked notes pay a fixed or floating interest rate and derive their performance based on the credit risk associated with one or more underlying entities or references. The risk of default or credit downgrades affects the final payout.
8. Commodity-Linked Notes
These notes are linked to the performance of a commodity or a basket of commodities. Investors can gain exposure to commodity price movements without directly owning the physical asset.
9. Foreign Exchange Linked Products
These structured products are tied to the performance of foreign currency pairs. They provide exposure to the FX market, offering potential returns based on movements in currency exchange rates.
10. Hybrid Products
Hybrid products combine features of various structured products, allowing customisation based on an investor's preferences and market outlook. They may incorporate equity, fixed income, foreign exchange, or commodities components.
Each structured product caters to specific investor needs and risk tolerance levels, making it vital for investors to conduct thorough research and understand the inherent risks before investing.
11. Structured Investment-Linked Policies (ILPs/SILPs)
Structured investment-linked policies (SILPs) are versatile financial products that combine elements of traditional life insurance with investment opportunities. These policies are designed to offer policyholders the potential for capital appreciation while also providing a death benefit.
Key Features of Structured Investment-Linked Policies
Investment Component: A portion of the premium paid is allocated to various investment funds, which can include equities, bonds, or alternative assets. The performance of these investments directly influences the cash value of the policy.
Insurance Coverage: SILPs offer a life insurance component, which ensures that beneficiaries receive a death benefit. This benefit is typically paid out in addition to the cash value accrued through investments.
Customisation: Policyholders often have the flexibility to choose their investment strategy based on risk tolerance and financial goals. Options may include safe, conservative investments or more aggressive portfolios aimed at higher returns.
Market Linkage: The returns on the investment component can be linked to the performance of specific financial indices, commodities, or structured products. This structure can provide potential upside without direct exposure to the market risks associated with individual stocks.
Liquidity Options: Depending on the policy terms, policyholders may have the option to withdraw some of the accumulated cash value or take loans against the policy, providing a degree of liquidity.
Advantages of Structured Investment-Linked Policies
Dual Benefit: SILPs offer both investment growth potential and life insurance protection, making them appealing to a wide range of investors.
Tax Efficiency: Depending on local regulations, the growth of the investment component may be tax-deferred, providing an advantage over other investment vehicles.
Professional Management: The investment component is typically managed by financial professionals, allowing policyholders to benefit from expertise in asset allocation and management.
Considerations
While SILPs can be an attractive option for many, prospective policyholders should be aware of certain considerations:
Costs: These policies may have higher fees compared to traditional life insurance or other investment products, which can impact overall returns.
Complexity: The structure of SILPs can be complex and may require a comprehensive understanding of the investment strategies to make informed decisions.
Market Risk: While the insurance component provides a safety net, the investment returns are subject to market performance, which can fluctuate significantly.
Take note that while Structured Investment Linked Products (SILPs) do indeed have a component related to insurance, it is important to understand that this insurance aspect is typically very limited in scope. It is commonly restricted to just a death benefit or a terminal-illness benefit, wherein approximately 101% of the invested capital is returned to the designated beneficiary upon the death or terminal illness of the person whose life is assured. Therefore, it can be concluded that SILPs are generally more suited for investment purposes, rather than for providing comprehensive protection.
Additionally, SILPs are sometimes referred to as 101s, a term that comes from the 101% death or terminal-illness benefit feature. This terminology helps to differentiate them from traditional Investment-Linked Policies (ILPs), which usually offer more extensive life insurance coverage for policyholders.
In summary, structured investment-linked policies provide a unique blend of life insurance protection and investment growth potential. They can be an effective tool for individuals looking to diversify their financial portfolio while ensuring that their loved ones are financially protected. Always consult with a financial advisor to assess whether SILPs align with your financial objectives and risk profile.