Tuesday, November 4, 2008

Basic things you should know about Structured products

Many of you might have heard about the DBS High notes Series and Lehman Mini bond Series giving so much trouble as investors were 'bluffed' in to buying them, it is actually important to know what you are getting yourself into when you buy such structured products.

Here are some important things that you should know:

Structured product
s are packages of various investment strategies and ideas packaged into a single deal and sold to the people by financial institution.
These products can be sold through middlemen. For example Company A comes up with the product and Company B helps to sell it.

Capital Protected
products are usually 'protected' by the instruments that are used.
For example, 85% of the of the product could be in bonds ( which are relatively low risk) and the rest of the 15% in higher risk products like stocks in order to give you a higher return.
Hence if anything major were to happen, at the the 85% of the products will still be there, limiting the downside loss.

However capital protected products only protect you from market risk and not credit risk. I.e if the company that comes up with the product ( company A) closes down, the investor losses everything.

Capital guaranteed
means that your investment is guaranteed by a 3rd party and not by the person who is selling you, or the person that is issuing the product.

An example would be Company A sets up a structured product, and ask Company B to sell it. However this structured product is guaranteed by Company C. Hence as an investor who is buying from Company B, you should worry about whether Company C is credible enough to pay you, in the event Company A faces problems.

Usually such products have lower risk and lower returns because part of the product consists of 'insurance fees' paid to the guarantor( Company C)

These are the basics of structured product. However there are still MANY things that you should know, like what are the returns like and the other risks involved. I always believe that you should ask for the worst case scenario and judge how likely that it will happen before buying it. And if possible ask an unbiased financially savvy person on what he/she feels about the product. This should give you somewhat protection from being 'swindled' by the bank manger.