Structured Investment Products

Structured Products

Structured products are fixed term investments that can offer returns that are linked to the performance of the market, such as the stock market index, FTSE 100.

When determining which structured product to invest in, individuals need to take into account their investment objectives and their attitude to risk.

How they work

When you choose to invest your capital, you are investing this capital over a fixed term. Therefore, if you want some of that capital back in a few years, it is better to choose a structured product with a term that is relatively shorter than the average investment period for these investments. There are two main types of structured products:

  •       Deposit and;
  •       Investment

The growth/income these investments produce depend on the performance of the market. However, the biggest difference is that deposits give you the possibility of getting a stock market return without risking your capital, while structured investments offer you a lump sum at maturity (plus any growth/income) depending on the performance of the stock market. Therefore, structured investments are seen as higher risk, although the returns can often be higher.

The capital invested is spilt into two parts by your fund manager:

  •       One part buys an investment with a counterparty, this part is generally intended to return most of your original investment value
  •       The other part is also invested within a counterparty; but this time it is intended to produce income or growth (depending on your plan)

As you reached the end of the fix term, depending on your plan and how the index performs you may receive:

  •       Your original capital invested
  •       Less or none of your original capital invested
  •       Growth that has accumulated

If you receive less or none of your original investment, this is because within your plan, it may have a pre-set limit whereby if the performance of the index falls below a certain percentage, this will cause you to receive less of that original capital invested. For example, if your plan includes a pre-set limit of more than 50%, the amount of your original investment you get back is cut by that percentage. Therefore, if you initially invested £1,000 and the index fell by 60%, you would only receive 40% of your initial investment value, which would be £400.

Likewise, growth you would receive from your plan would depend on the performance of the index, so if the FTSE 100 were to rise, you would receive some capital from this growth. Some plans allow you to take regular income, but your initial capital is still determined by the performance of the stock market.

It is important to be aware that if the counterparty company fail, you are at risk of losing all your money and due to the fact it is the counterparty and not the direct provider, you may be unable to claim.

Risks

Within structured products, individuals are often weary of their investment performing poorly and therefore are sceptical regarding the growth. Further to this risk, consideration needs to be taken into account of the risk involved with the original value of the capital invested.

It is often the underlying investments that hold the most risk as you haven’t got a direct agreement with the counterparties involved. It is the provider that may have insurance with in regards to your investment, but not the counterparty. Although, some providers ensure that sufficient insurance is maintained for the counterparties in relation to individual’s investments.

Therefore, determining what protection your structured product involves is important when deciding on purchasing this type of investment. You could receive full protection, which means you should receive at least the value of capital you originally invested, or there’s partial protection; this depends on the index performance in regards to the amount of your original investment you will get back.

This article should not be taken as advice, it is provided solely for information purposes. Professional advice should be taken if individuals wish to investment within these products.