Structured Products

What is a Structured Product?

A structured product, also known as a market-linked product, is a pre-packaged investment strategy based on derivatives such as a single security, an index, debt issuances or even foreign currencies. Most structured products that are sold in India, have ‘principal protection’ function as the key, which means that the investor is assured that he will not lose anything from what he has invested. Structured products are designed to facilitate highly- customised risk-return objectives.

How does a structured product work?

Let us take the example of a simple Nifty-linked capital protection structure. Say, you invest Rs 100 in a product with a tenure of 40 months. Of this, Rs 80 is invested in debt securities, yielding a return of 6-7% per annum. Thus over a period of 40 months, you could get Rs 20 as interest on these debt securities.

Hence, this ensures that your capital of Rs 100 is protected. The balance of Rs 20 available is invested in the Nifty. If the Nifty doubles in 40 months, Rs 20 will become Rs 40. Thus the value of your Rs 100 will be Rs 140 at the end of the period giving you an absolute return of 40%.

On the other hand, if the Nifty were to fall by say 50%, then Rs 20 invested would become Rs 10, thereby giving you Rs 110 back. This strategy ensures that at any given time, your capital is protected and you will get Rs 100 back at the end of 40 months.

While this is a simple structure, more complex structures using quantitative strategies could be deployed, depending on the risk profile of the investor to generate higher returns.

Equity Linked Debentures

With the high volatility in the equity markets, investors are increasingly looking at financial products which provide stability along with decent returns.

‘Equity-Linked Debentures’ (or ELDs) are products that provide:
1) Capital protection,
2) A slice of the stock market based returns

What are ELD’s?

An ELD is a form of a fixed income product.
It differs from standard fixed-income product as the final payout is also based on the return of the underlying equity, which can be a set of stocks, basket of stocks or an equity index (all pre-defined) It is structured so as to give 100% capital protection with a provision for equity participation. Bonds are rated by an accredited rating agency.

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