Structured Product - WealthKing

What is Structured Product ?

A structured product is an investment vehicle that combines multiple financial instruments, typically a combination of derivatives and traditional assets like stocks, bonds, or indices, to achieve specific risk-return characteristics. Structured products are often customized to meet specific financial goals, such as capital protection, enhanced returns, or exposure to particular markets or assets.

Purpose of invest in structured product ?

Investing in structured products can serve a range of financial purposes, depending on an investor’s goals, risk tolerance, and market outlook. Here are some of the key reasons investors choose structured products:

1. Capital Protection

Objective: Many structured products, especially principal-protected ones, offer capital preservation, meaning the initial investment is safeguarded (if held until maturity) regardless of how the underlying asset performs.
Benefit: This is particularly appealing to risk-averse investors or those looking to safeguard their capital in volatile markets while still having exposure to potential upside.

2. Enhanced Yield and Income Generation

Objective: Structured products can provide enhanced yield compared to traditional fixed-income investments by incorporating options or yield-enhancing strategies.
Benefit: Yield-enhancement products, like reverse convertibles, can generate regular income or higher yields than standard bonds or savings instruments, making them attractive to income-focused investors.

3. Market Access and Customized Exposure

Objective: Structured products allow investors to access specific assets, sectors, or strategies that may otherwise be challenging or expensive to invest in directly (such as commodities, foreign assets, or specific indices).
Benefit: Investors gain exposure to particular market segments or assets with defined risk/return profiles, potentially achieving diversification benefits.

4. Leverage and Potential for Higher Returns

Objective: Certain structured products offer leveraged exposure to an underlying asset, magnifying potential returns while limiting downside risk.
Benefit: This structure appeals to investors seeking higher returns on specific assets, like equities or indices, without direct ownership. Leveraged products can potentially provide outsized gains, though they also carry higher risk.

5. Tax Efficiency

Objective: Some structured products are designed to optimize tax outcomes, such as deferring taxes or benefiting from favorable tax treatment on certain components.
Benefit: This is useful for high-net-worth investors seeking tax-efficient income or growth, as structured products can help manage taxable events.

6. Portfolio Diversification and Hedging

Objective: Structured products enable investors to diversify portfolios by adding non-traditional asset classes or tailored strategies that may perform independently of standard assets like stocks and bonds.
Benefit: For investors looking to manage risk or hedge against specific market conditions, structured products can provide downside protection or add non-correlated assets, enhancing overall portfolio stability.

7. Defined Return Profile and Predictability

Objective: Structured products are often designed with a specific payoff structure, allowing investors to predict potential returns based on set conditions (e.g., if an index hits a certain level).
Benefit: This appeals to investors seeking predictability and alignment with their financial goals, as the product’s return and risk are clearly defined from the outset.

8. Access to Alternative Strategies and Flexibility

Objective: Structured products can incorporate complex financial strategies, such as options or derivatives, that are typically difficult for individual investors to access directly.
Benefit: This flexibility enables investors to pursue strategies like enhanced yield, downside protection, or customized returns based on specific market views or conditions.

How structured product works ?

Structure and Composition: A structured product typically includes two main components: a bond (or fixed-income component) and a derivative (such as an option). For example, a principal-protected structured product might invest part of the capital in a bond (which matures at face value) and the rest in an option on an equity index for potential upside.
Maturity and Payoff: Structured products usually have a set maturity date, at which the payoff is based on the performance of the underlying asset or index. Investors may receive a fixed or variable return, based on predefined conditions set at the outset.
Linked Performance: The returns (or losses) from the product depend on how the underlying assets perform relative to the defined structure, such as breaching price barriers, hitting range limits, or meeting other performance criteria.

What are risk factor involve in it ?

Credit Risk: Structured products are often issued by financial institutions, so investors bear the credit risk of the issuer. If the issuer defaults, investors may lose their investment.
Liquidity Risk: Structured products can be difficult to sell before maturity, as there is often limited secondary market trading.
Complexity and Lack of Transparency: Structured products can be complex, and their returns are based on derivative pricing, which may not be transparent or easily understood.
Market Risk: The return of structured products depends on the performance of the underlying assets, which can be volatile and may result in losses if certain conditions aren’t met.

How much return you expect from structured product investment ?

The expected return from an investment in structured products can vary significantly depending on several factors such as the type of structured product, the underlying assets, the risk profile, and market conditions. Since structured products are customizable, they can be designed to offer a wide range of returns, from capital protection to enhanced yields or leveraged returns.

Here’s an overview of what you can generally expect from structured products:

1. Capital-Protected Structured Products

Expected Return: Typically low, often in the range of 2% to 5% per annum.
Risk/Return Profile: These products prioritize the preservation of capital (especially principal protection) and offer limited upside potential. Returns are generally linked to the performance of the underlying asset, but the capital is protected, meaning the investor receives at least their initial investment back if held to maturity.
Example: A structured product tied to an equity index with a 100% capital guarantee might offer a return based on the index’s performance, with a capped upside.

2. Yield-Enhancement Structured Products

Expected Return: 6% to 10% per annum or higher, depending on the structure.
Risk/Return Profile: These products are designed to generate higher returns through strategies like selling options (such as reverse convertibles), but they may involve some risk to principal. Returns are usually tied to the performance of the underlying asset or a defined payout structure.
Example: A reverse convertible structured product may offer a high coupon (say, 8% annually) but could result in the investor having to take delivery of an underlying stock if the price falls below a certain threshold.

3. Leveraged Structured Products

Expected Return: 10% to 20% or more per annum (depending on the leverage and market conditions).
Risk/Return Profile: Leveraged structured products amplify both the potential returns and risks. The investor gains a magnified exposure to the performance of the underlying asset. While this can lead to higher returns if the market performs well, it also increases the likelihood of significant losses if the market moves unfavorably.
Example: A leveraged product tied to an equity index could provide 2x or 3x the performance of the index, meaning if the index goes up by 10%, the return on the structured product could be 20% or 30%.

4. Range or Barrier Structured Products

Expected Return: 5% to 15% per annum, depending on the underlying asset and the specific conditions set in the product.
Risk/Return Profile: These products are designed to generate returns if the underlying asset stays within a specified range or hits certain barrier levels. The payoff can be high if the conditions are met, but if the underlying asset moves outside the range, the investor may lose out on the return.
Example: A barrier note linked to a currency pair might offer a high coupon if the exchange rate stays within a certain band, but the return would be lost if the rate moves beyond the threshold.

5. Equity-Linked Structured Products

Expected Return: 5% to 15% or more per annum, depending on the performance of the underlying equity index or stocks.
Risk/Return Profile: Equity-linked structured products may offer returns tied to the growth of a specific stock or stock index. The upside potential is often higher than capital-protected products, but it comes with the risk of losing money if the underlying assets perform poorly.
Example: An equity-linked note might offer a 10% return if the linked stock index rises by a certain percentage over a year, with some downside risk (partial capital protection or full exposure to downside risk).

6. Commodity or Currency-Linked Structured Products

Expected Return: 6% to 12% per annum, depending on the performance of the underlying commodity or currency.
Risk/Return Profile: These products are linked to commodities (such as gold, oil, or agricultural products) or currency pairs. The return potential depends on the price movement of the commodity or currency. These can be volatile investments, offering high returns in favorable markets but also significant risk of loss if market conditions turn adverse.
Example: A commodity-linked structured product tied to the price of gold may provide high returns if the price of gold rises sharply, but it could lose value if gold prices fall.

Factors Affecting Returns:

Market Performance: Returns are largely dependent on the performance of the underlying asset or index. If the asset performs well, structured products can offer high returns, but if the asset underperforms, returns may be lower or there could be a risk to principal.
Risk Appetite: More aggressive structured products (like leveraged or yield-enhancement structures) can offer higher returns, but they also come with higher risks. Conservative investors may prefer capital-protected or lower-risk options, which tend to offer lower returns.
Issuer’s Credit Risk: Structured products carry the credit risk of the issuing institution. If the issuer defaults, the investor might lose some or all of their investment, regardless of the performance of the underlying asset.
Market Conditions: Economic conditions, interest rates, volatility, and other macroeconomic factors can influence the returns of structured products. The value of the underlying asset or index can be affected by broader market events.
Product Structure: The specific design of the structured product, including the type of derivatives used and the predefined payoff conditions, will affect the expected return.

Typical Return Range Summary:

Type of Structured Product	Expected Return Range (Annually)	Risk Level
Capital-Protected	2% to 5%	Low to Moderate
Yield-Enhancement	6% to 10%	Moderate
Leveraged Products	10% to 20% or more	High
Range or Barrier Notes	5% to 15%	Moderate to High
Equity-Linked	5% to 15% or more	Moderate to High
Commodity/Currency-Linked	6% to 12%	Moderate to High