Structured Notes & Structured Deposits – Are They Good Investments?

Structured Notes & Structured Deposits - Are They Good Investments?

Structured Products are gaining traction again even after the 2008 financial crisis. A particular type of Structured Product, called Structured Notes, led to the undoing of many retail investors in Singapore at the advent of the crisis.

The public seems to have forgotten the crisis itself because there has been growth in demand for structured products, particularly structured deposits, which somehow offers a guaranteed return of capital, unlike structured notes.

What are Structured Deposits?

Structured Deposits work 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 traditional deposits, structured deposits offer variable growth rate, which depends on the performance of any instrument, security, or derivative. For example, if a structure deposit tracks a basket of equities, the structure deposit’s returns increases as the equities perform better.

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.

Structured Notes & Structured Deposits - Are They Good Investments?

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What are Structured Notes?

Structured Notes are flexible investments products whose performance of returns in connected to another asset’s performance. These assets may be indices, equities, bonds, baskets of securities, fixed-income securities, forex rates, derivatives, interest rates, commodities, credit swaps, futures, options, and even head funds. The returns of the structured note can exist in the form of interest returns or return of principal, which are both linked to the performance of the underlying asset/benchmark.

Structured Notes are the investment vehicles greatly involved in the 2008 financial crisis. Unlike its recently popular sibling, Structured Notes do not come with a guarantee of principal capital return. Its true use lies only in the performance of the underlying assets it is pegged on.

Investors are advised to pay no heed to salespeople who market their Structured Notes with “capital protection” because Structured Notes do not come with anything like that.

Which is better, Structured Notes or Structured Deposits?

You may see Structured Notes as risky and tainted with bad reputation. Structured Deposits on the other hand has a sweeter appeal to people.

Structured Deposits returns start at 1% rate and returns may grow bigger and bigger in time. Fixed deposit rates are capped at 1% until maturity. Structured Deposits are also less risky than equities, and can actually guarantee a return of principal.

Like any other managed investments, Structured Deposits charge opportunity cost. And like any other investment, Structured Deposits can’t guarantee returns. You will also need bigger funds to start your Structured Deposit, compared to fixed deposits.

Structured Notes & Structured Deposits - Are They Good Investments?

Structured products like Structured Deposits can be a very lucrative investment, but like any other investment, it should answer a specific problem or help you achieve a specific goal, in spite of all the risks it brings.

If your goal is to secure a stable retirement life, don’t invest in Structured Deposits. It is always wiser to secure a stable inflow of cash and a sufficient amount of savings and emergency funds before you invest, particularly in risky investments like structured products.

A better question: Which investment type is best for your needs?

Any determined investor can go through thick complexity. Some investors managed to survive the financial crisis. It takes in-depth financial knowledge, a lot of digging, a lot of analyzing, and guts to go against market flow to save your money as the crisis builds up.

In order to know the answer to this question, make it a habit to constantly increase your Financial IQ. Instead of asking which investment yields more money or which investment is easier to invest in, ask which investment best fits your needs. Remember: There is no one-size-fits-all type of investment.

Remember: There is no one-size-fits-all type of investment.

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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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