What are structured products?
Structured products are financial instruments that are engineered to meet specific investment goals while providing a predetermined level of risk and return. Typically, these products combine traditional securities, like stocks or bonds, with derivatives to create a payout profile that can differ significantly from conventional investments.
Often created by investment banks, structured products are tailored to investor preferences regarding potential returns, risk exposure, and market conditions. They can take various forms, including equity-linked notes, credit-linked notes, and market-linked CDs, among others.
One primary characteristic of structured products is their maturity structure. They generally have a fixed term, which can range from a few months to several years. At maturity, the investor receives a payout based on the performance of the underlying asset or index. This payout is often contingent upon certain predetermined conditions being met.
Investors might choose structured products for several reasons:
Customisation: They offer a way to align investments with specific market views or risk appetites.
Potential for enhanced returns: Depending on the structure, they may provide higher returns compared to traditional fixed income instruments.
Downside protection: Some structured products are designed to protect against market downturns, providing a cushion for the investor.
However, these products also come with drawbacks. They can be complex, making them challenging for many investors to understand fully. Additionally, there are risks associated with liquidity, as they may not be easily tradable in secondary markets. Furthermore, the performance of structured products often hinges on the creditworthiness of the issuer.
Take note that structured products are unsecured debt securities of the issuer. As such, it's crucial to understand that, as unsecured debt securities, these products do not provide any collateral in the event of the issuer's default. Consequently, the investment's safety heavily relies on the issuer's credit quality. Therefore, potential investors should thoroughly evaluate the issuer’s financial health and associated risks before investing in structured products.
Notwithstanding the risks involved, structured products can serve as useful tools for certain investors seeking tailored investment solutions. It is essential for potential investors to thoroughly evaluate the terms, underlying assets, and risks involved before incorporating these products into their portfolios.