Structured Deposits 101 : All You Need To Know

Structured Deposits in Singapore : Investing In Structured Deposits

Structured Deposits offer a combination of money deposits and investments product. Imagine depositing your money and getting the most out of it as you sleep. The returns of structured deposits rely on its underlying asset’s performance. Like conventional investment funds, the investment returns of Structured Deposits are based on the performance of the underlying assets the Structured Deposits track.

Structured Deposits – a type of structured product – is like having someone win a card game for you (with money at stake) so that you can win the pot. The deal won’t be on until you put some money down and you can’t withdraw from the bet until someone wins. If your proxy wins, you share the pot. If your proxy loses, you lose a part of your money.

Unlike fixed deposits, structured deposits offer the potential of getting high returns. However, it also comes with more risks.

How much can I earn with Structured Deposits?

The returns depend on the performance of another financial asset. Depending on the product, you can earn through the cap placed on the asset or through a participation rate.

When you buy a structured deposit, your money will be locked for a set period of time, usually five or six years. In turn, you will get a certain lump sum of money when the product matures. The amount that you will get depends on how strong the products’ market link performs.

Why should I invest in Structured Deposits?

If you don’t want your money just sleeping in the bank, and if your appetite for risk is not so conservative, you can invest in structured deposits. Structured deposits offer higher returns versus fixed deposits.

This product is great for investors who want to expose their money in assets that are not usually provided for some retail investors. Since structured deposits depend on another financial instrument, your money, in essence, is exposed to those financial markets.

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What are the risks involved in Structured Deposits?

Before investing in structured deposits, you have to know that there is a possibility for you to lose all of your returns. Since structured deposits rely on another instrument, that instrument can underperform and affect your gains.

Aside from losing your profits, you are also exposed to credit risk.

You are also locked with this instrument. Withdrawing early can mean that you will lose the entire principal you invested.

Here are the other risks involved with structured deposits:

Greatly affected by interest rate changes

Interest rates will affect the investment’s value as time passes. Interest rate changes affect the underlying assets of structured deposits and the other factors surrounding them.

Not liquid

Just like any other investment, investing in structured deposits involve risks as well. It’s not easy to sell structured deposits – it is not liquid. If you withdraw from your investment, you may lose 100% of your principal.

Extremely complex nature

Its complexities leave room for a lot of error. It is hard to determine the number versus number scale between getting structured deposits and getting each product inside it individually, so there is still no actual proof in numbers that one is better than the other.

Equity-linked risk and Bond-linked risk

The underlying assets which may be equities or bonds do not always move in your direction. If the conditions of the returns are based on a cap, you carry the risk of the possibility of getting higher returns if you just invested directly to the financial market that the structured deposit relies on.

Interest rate-linked risk

Interest rate is affected by a magnitude of factors and may be very volatile. It will not always go your way.

Other risks

Structured deposits have variable maturity dates. There’s a chance that your structured deposit that has a maturity of 3 years won’t necessarily last until the third year, depending on the bank’s decisions. When the bank that issued your structured deposit goes bankrupt, your structured deposit cannot be recovered, unlike fixed deposits, which can be recovered up to $50,000 worth of deposit insurance coverage.

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What are the types of Structured Deposits?

Equity-linked – Structured deposits linked to shares, a basket of shares, equity index, or basket of indices.

Bond-linked  – These are structured deposit linked to a single bond, a basket of bonds, bond index, or a basket of bond indices.

Bond-linked interest rate-linked – Structured deposits linked to floating interest rate.

Credit-linked – These are structured deposits linked to the credit of particular entities.

Structured deposits VS Fixed deposits in Singapore

Minimum deposit – Structured deposit requires a higher minimum deposit of S$5,000. Fixed amount deposits can be cheaper at S$1,000.

Maturity – Structured deposits’ maturity periods may last from 2 weeks to 10 years, while fixed deposits’ maturity periods can last from 1 month to 3 years.

Principal – The capital used in structured deposits will be paid in full at maturity. However, if you withdraw before maturity, the bank will get the whole principal. Fixed deposits’ principal will be repaid in full at maturity time.

Returns – Structured deposits offer the potential of getting higher returns versus fixed deposits. Returns in structured deposits may be received on a cap rate or on a participation rate. Returns on fixed deposits are lower because funds are usually placed in money markets which yield lower gains.

Risks – High risk is involved in structured deposits because it relies on another asset’s performance. Fixed deposits are low-risk investments and banks are obliged to give the principal back in full at maturity.

Early withdrawal – If the depositor of structured deposits withdraws before maturity, she may lose her whole principal. Early withdrawal in fixed deposits will only entail bank charges.

Structured deposits are great opportunities to earn, however, they are not for everyone. Do not go into structured deposits if you want higher returns but you’re not prepared for its variable traits – the possibility of not receiving what you expected or even getting lower returns. Also, this is not an investment for people who are not okay with leaving their money tied up for a certain period. Lastly, do not invest in structured deposits if you are not familiar or not fine with the credit risk of the institution offering the product.

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Anna V. Haotanto

Anna V. Haotanto

Anna Haotanto is passionate about finance, education, women empowerment and children’s issues. Anna has been featured in CNBC, Forbes, The Straits Times, Business Insider, INC and The Peak Singapore.

She was nominated and selected for FORTUNE Most Powerful Women conference in 2016 (Asia) and 2015 (San Francisco, Next Gen).

Anna has 10 years of experience in the financial sector and is currently a Director in Tera Capital. Her previous work experience includes positions at Citigroup, United Overseas Bank, a regional role in Business Monitor and a boutique private equity firm based in Shanghai. She graduated from Singapore Management University (Finance and Quantitative Finance).
Anna V. Haotanto

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