What are Structured Products?
“Structured Product” is a collective term for both Structured Investment Products and Structured Deposits.
What is a Structured Investment Product?
A Structured Investment Product is a legally binding contract between an investor and a bank. The investor lends money to the bank for the life of the product (typically five years). At the end of the product life, the investor receives the product return from the bank, subject to Counterparty Risk. The product return is based on a formula, sometimes based on the performance of the prices of individual shares, but more typically on a share price index, such as the FTSE 100 or S&P 500.
What are the features of Structured Products?
At their most basic, structured investments aim to protect some or all of the money invested whilst providing some growth on the investment or a measure of predefined income throughout the life of the investment. They are fixed term products which mean that you must be prepared to “lock in” your money for the term of the investment (often 5 to 7 years) and are often used as part of a wider investment portfolio to act as a hedge against more mainstream investments.
Income or Growth
Structured investments paying regular income distributions can allow an investor to budget for known expenses more easily as the basis of the return of capital at the end of the term is clearly defined at outset.
Structured investments geared to growth may offer an accelerated rate of growth as compared to the index or indices to which the product is linked. Where the rate of participation is significantly greater than 100% of the growth in the index or indices, from the start date to the maturity date, there will likely be a trade off with lower levels of capital guarantees. Where the participation rate is lower, there will likely be a higher level of capital guarantees on offer.
Structured Product returns are often calculated using the average level of prices over the last few months of the product life. This reduces the risk of poor returns from a “last minute” decline in share prices. But conversely, it also introduces the risk that you might miss out on a late rise in share prices.