Structured Investment - Guide and Information You Should Know

The Structured Investment segment always considered as one in which retail investors have more alternative ways to diversify into the investment products, in terms of preferred assets class and the variety of combinations of returns available. 

However in investment markets we heard many comments such as “they are ideal and very attractive now to capitalize the high volatility of markets”, “investment plans look less attractive when markets are on the very high-side now”, “markets have hit bottom and time to accumulate” are consistently thrown around by many familiar with investment markets. 

But, in truth, the flexibility afforded by these new alternative investments world means that they can be structured or designed to suit not only many different individual profile with differ risk appetites but also many different investment market cycles and climates of the current investment trend. 

Over the last two decades or so, and on top of the usual equity highs and lows, the investment markets have had to swallow some contagion financial crisis such as the Asian Financial crisis, the fall-out from Lehman Brothers, the credit and liquidity crisis, the banking crisis, recession, fear of a double dip recession and now the continuing Eurozone debacle, the fear of falling oil prices, IS and unrest in middle east countries. 

The timely introduction of structured investment products are ideal for defining risk, return, exit, and direct entry into the investment markets, may be attractive to capitalize and take advantage the current investment scenarios.

Below are some salient features of structured product and what you should know and how does it influence the product.  

1. Capital Protection

A fixed level of protection regardless of the performance of the underlying asset.

What you should know - Apart from the counter party risk, this is as near to full capital guaranteed protection as you can get. However, it is not always 100% and needs to be checked. Generally, a lower capital protection level and higher participation rate will give you a higher potential return on investment, and vice versa.

2. Soft Protection

Protection of the initial capital is dependent on the performance of the underlying asset. The protection level may reduce or even disappear if the underlying asset breaches a certain level on the downside. Where this floor is set affects the cost of the product and therefore will affect the participation levels.

What you should know - Whether capital or soft protection is chosen and at what level, is dependent on the risk profile of the client and their confidence in the markets. Where there is more than one underlying asset or index, terms need to be examined closely to determine how many of the assets need to breach the levels set before downside protection is affected.

3. The Capital Protection Level

This is the percentage of your investment that you are guaranteed to get back when your structured product reaches maturity. You can set this level up to 100% (guaranteeing that you get back your investment in full).

What you should know - By lowering the capital protection level to 90%, for example, you will be putting 10% of your money at risk, but your potential return on investment will increase significantly.

4. Participation Rate

The return at maturity is based on the performance of the underlying asset, but is often geared to return a fixed percentage of the performance of the underlying assets at, greater or less than 100%.

What you should know - Usually the higher the participation rate, the less the level of protection and/or a lower capped maximum.

5. Product Maturity

Product maturity refers to when a structured product will expire. 

What you should know - The maturity date of structured investments is pre-determined. It can be days, months or as long as 10 years. A product with a "Product Maturity" of 60 days, for example, will expire in 60 days. A product's return on investment is determined on the date it reaches maturity. The earnings from the product will be returned to the investor's transitory account.

Source: alpari.com, "What is "product maturity"?"

6. Lock-up Period

The pre-determined time frame in which investors of a structured investments are not allowed to redeem or sell. The lock-up period helps portfolio managers avoid liquidity problems while capital is put to work in sometimes illiquid investments.

What you should know - Some investments require up to a two-year "lock-up" commitment, but the most common lock-up is limited to one year. In some cases, it could be a hard lock, preventing the investor from withdrawing funds for the full time period, while in other cases, an investor can withdraw funds before the expiration of the lock-up period provided they pay a penalty. This second form of lock-up is called a soft lock and the penalty can range from 2-10% in some extreme cases.

7. Kick-Out

If the original target return or a predetermined level is reached early (usually at a specified point during the term), the plan will mature early.

What you should know - Usually this is a good thing for investors.

More information on structured investments in Malaysia

1. Banking Info - Structured Investments