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Structured products Investment products PARVESH AGHI

What Are Structured Products?

Product features
Structured Product is a combination of bond + derivative It has flexibility with respect to the underlying asset.

Structured products offer retail investors easy access to derivatives.


In their simplest form, structured products, offer investors full or partial capital protection coupled with an equity-linked performance and a variable degree of leverage.
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They are commonly used as a portfolio enhancement tool to increase returns while limiting the risk of capital loss. These objectives may include capital protection, diversification, yield enhancement, leverage, regular income, tax/regulation optimization, and access to non-traditional asset classes, among others. Structured products can be tailor-made to meet specific investors requirements.
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Customize investments according to specific market views .

Conveniently gain access to alternative


investment classes that may be difficult to invest in directly

Eliminate or hedge specific portfolio risks or


business risks

Currency risk of foreign investment assets

Structured investment products are


investment vehicles which allow investors convenient and tailored exposure to a specified reference asset.

Both upside and downside exposure to the


reference asset can be modified to suit investors investment preferences.

Structured products are synthetic investment instruments. Specially created to meet specific needs that cannot be met from the standardized financial instruments available in the markets. They can be used: as an alternative to a direct investment; as part of the asset allocation process to reduce risk exposure of a portfolio; or to utilize the current market trend.
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Structured products offer retail investors easy access to derivatives. Structured products are designed to facilitate highly customized risk-return objectives. This is accomplished by taking a traditional security, such as a conventional investment-grade bond, and replacing the usual payment features (e.g. periodic coupons and final principal) with non-traditional payoffs derived not from the issuer's own cash flow, but from the performance of one or more underlying assets.

How does it work?


A Structured Note combines two elements: A bond (that protects your principal) makes up most of the investment (typically 80%), and the rest of your money is put into a derivative. Because the investment bond element in Structured Notes can be designed to give a return that equals your initial investment (as long as you keep the product until maturity), your principal will be protected.

And the derivative element offers you the potential to achieve higher returns when compared with a standard deposit.
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Structured Note terms are generally between 18 months and six years and it is important that you can afford to tie up your money for that period, because your principal is only protected when Structured Notes are held for their full term.

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Structured Note examples


For example, you could choose a two year 100% principal protected Structured Note linked to gold At maturity, the investor receives 100% of the principal investment, and has the potential to get higher returns subject to the favorable movement in the price of gold over the two-year term.

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EXAMPLE
Let us take the example of a simple Niftylinked capital protection structure. Say, you invest INR 100 in a product with tenure of 36 months.

Of this, INR 80 is invested in debt securities, yielding a return of 7-8% per annum. Thus over a period of 36 months, you could get INR 20 as interest on these debt securities.

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Hence, this ensures that your capital of INR 100 is protected. The balance of INR 20 available is invested in the Nifty. If the Nifty doubles in 40 months, INR 20 will become INR 40. Thus the value of your INR 100 will be INR 140 at the end of the period giving you an absolute return of 40%. On the other hand, if the Nifty were to fall by say 50%, then INR 20 invested would become INR 10, thereby giving you INR 110 back.

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This strategy ensures that at any given time, your capital is protected and you will get INR 100 back at the end of 36 months. While this is a simple structure, more complex structures using quantitative strategies could be deployed, depending on the risk profile of the investor to generate higher returns.
The above example is very basic and simplified structured product idea for understanding purpose only. The same basic structure, when applied to alternative asset classes, allows investors to take a position on a wide variety of assets, with downside protection thrown in.
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Structured Products Overview


What are the building blocks of Structured Products?
The pricing components of an Index-linked Principal Protected Structured CD are: A zero coupon bond

An equity or index option


Zero Coupon Bond Option Principal Protected Structured Product

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Substitute Nifty with options on commodities, bullion, international equity indices - and you suddenly have a range of investment alternatives that you can now take a view on, seek to capitalise on a move in one direction or another - and yet have your principal protected, if the call goes wrong. Because you are dealing in the world of options, you are not wedded to the notion that the market has to only go up for you to make money.
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If you believe the market will crash, well buy a structured product whose options seek to play that scenario. If you believe one sector will do either very well or very badly, look to make money from that move whether up or down. The central idea behind a structured product investment therefore is to look for opportunities where you believe an asset class will move significantly - one way or another - and seek to make money from that move, with some downside protection thrown in.
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Most structured products that are sold in India, have 'principal protection' function as the key, which means that the investor is assured that he will not lose principal amount invested by them subject to conditions of the issue. Structured products are designed to facilitate highly-customised risk-return objectives.
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Structured products provide the investor with the ability to tailor their returns to provide capital growth, income or even a combination of the two. Structured products can also be designed to provide positive returns even if the direct investments in a market would have produced a loss.
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Important points Exposure to the underlying asset Principal protection when held to maturity Potential higher return than a deposit
Diversification Issuer risk
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Advantages
Structured products help manage risk and return expectations across a wide array of underlying asset classes They enable investments in markets otherwise difficult to access: e.g. oil, commodities, bullion, volatility, etc. Flexible exposure can be tailored to suit a client's portfolio need Adaptable exposure can be configured to reflect prevailing market conditions Customization & Client specific launches, subject to minimum corpus size, usually INR 5 Crores
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Disadvantages
Investments are not liquid, extremely limited secondary market transactions Individual components of a Structured Product are not transparent and costs can therefore be high Designed to be held to the end of the term, the benefits, including any protection of capital, only apply at maturity

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Investors may get back less than they invested if the product is redeemed before maturity or upon maturity if not capital protected If the issuer defaults, you may end up losing the capital. If you get back just your principal at the maturity, then you have suffered a notional loss of interest, as this money could have been used to earn from other avenues such as debt instruments.
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A structured product is a kind of fixed-term investment whose payout depends on the performance of something else, like a stock market index.

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Structured investments
Structured investments are commonly offered by insurance companies and banks. Your money typically buys two underlying investments, one to protect your capital and another to provide the bonus. The return you get depends on how the stock market index or other measure performs.

In addition, if it performs badly or the firms providing the underlying investments fail, you may lose some or all of your original investment
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How structured deposits work


When you buy a structured deposit you agree to tie up your money for a set time often five or six years in return for a lump sum at maturity. The amount you earn depends on how well something else performs often a stock market index such as the NIFTY or SENSEX.

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