Structured products are designed to fulfil particular risk-return objectives. These goals are reached by taking in conventional underlying assets and substituting their expected returns for non-traditional payoffs from other underlying investments.
Essentially, returns from structured products get compared to traditional returns from underlying assets. However, they are linked with swaps, futures, and other financial instruments in the event of an upside or a downside, to take advantage of greater participation.
Structured finance products offer investors the option to choose a tailored payoff that is generally a blend of fixed and variable market-related returns over the investment period, matching their own risk-return goals with appropriate tax planning.
Structured products in India are also linked up to the capital employed to NIFTY output and downside covered.
Structured products in India have the following elements
- The bond factor guarantees capital security. If the underlying asset does not perform at some point, the investor gets a 100 per cent return on the capital invested.
- The underlying asset raises the yield of the investment. The underlying factor would be a single instrument or basket of tools that may be an asset class, such as stock, debt, index, ETF, currency, or interest rate.
- The derivative variable helps to define the overall risk within the object. Options on the underlying asset are the derivatives that are commonly used. The derivative calculates that the instrument enables investors to get a targeted return on investment by customizing the underlying asset classes to reach specified financial targets.
Features of structured finance products:
- Usually, these products are long-term in nature, requiring a minimum lock-in period of 12 months and an investment horizon of two to three years to obtain maximum returns.
- Structured products, like any financial instrument managed professionally, also attract fees that may vary.
- These are often the amalgamation of multiple financial instruments integrated to achieve a predetermined objective.
- The risk of standardized items varies depending solely on the way they are standardized. It can range from conservative to aggressive, according to your preference.
- Structured investment products could be entirely secured, partially covered by the principal, or without principal protection expenditure.
Bear in mind that there are dynamic structured products. They are a combination, such as derivatives, of different risk-bearing processes. As an investor, you should consider the inherent risks to the investment.
Before investing in structured products, you need to assess the degree of risk tolerance and how much money you can risk.