If you’ve seen the film “The Big Short”, you probably got a slight idea of how structured finance works. It’s filled with complexities and they were made to be complicated. Though the film talks about the real-life housing crash in 2008, investors must also understand that not all Structured Products were made to fall to ashes.
Being the world’s fourth largest financial district, it’s no surprise that there are a lot of different investment products available to you in Singapore. Included in your choices are Structured Products.
What are Structured Products?
These market-linked investments are called Structured Products.
Structured Products are a mix of traditional financial instruments – stocks and bonds – with one or more elements that utilize derivatives. Structured Products are pre-packaged investments strategies. Some are based on options, commodities, currencies, a basket of securities, among many others. There is no single structure in Structured Products. Some products have different rules and functions – there are no single and uniform set of standards in these packages.
Since there are no standard form in Structured Products, does that mean that they can be customized?
Yes. In fact, that is one of the reasons this product is popular to investors with high risk appetites. These investors want high returns with a certain amount of control from their side since they can customize the package of the investment.
Who are Structured Products for?
Structured Products are suitable for investors with a high-risk appetite. This product enables them to take advantage of rising prices and maximize gains in sideways markets because its flexibility gives them a certain amount of control over these risks. Falling markets are not an issue as well because underlying areas of the structure may allow for the investor to benefit from failing markets, such as the foreign exchange market.
What are the pros of investing in Structured Products?
Advantages of investing in Structured Products in Singapore include having tax-efficient access to taxable investments, enhanced returns, reduced volatility, ability to earn in flat or sideways markets, protection of principal (only available in some structures).
What are the risks involved in Structured Products?
Just like any other investment, investing in Structured Products involve risks as well. It’s not easy to sell Structured Products – it is not liquid. If one is able to sell it, it would have been sold at a discounted price.
No daily pricing or net asset value
The pricing of an SP is, at the most, gained through a best-guess approach. This increases the risk of investors who are technical in nature.
Structured Products are an unsecured debt from investment banks
This will affect your credit as an investor, which will basically affect and roll out in all of your other investments on loan.
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 Products and getting each product inside it individually, so there is still no actual proof in numbers that one is better than the other.
How do Structured Products work?
There are two types of structured products: Structured deposits and structured investments. They work in different ways.
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.
Since Structured Products are highly customizable, the rules given per company may differ.
When you invest in structured deposits, there is a possibility for you to earn without risking your capital. However, there is also a possibility for you to get less interest compared to what you could have gained if you deposited your money in an ordinary savings account.
Like structured deposits, structured investments also lock your money for a given period of time. Some offer a lump sum at maturity based on the performance of the market the product is basing its profits on.
Unlike structured deposits, structured investments will give you a regular income. However, the drawback here is your capital’s security. There is no guarantee that you will get your capital in full because it depends on the performance of the market the product is basing its returns on. If for example, the market goes down, you may lose an enormous part of your investment as well.
Just like any other investment, it takes due diligence to understand truly if an investment is worth pursuing, especially with Structured Products that don’t have a definite set of rules because of its high customisation quality. Interested investors must look deeply into what companies are presenting and must take note of the risks involved in comparison to the rewards.
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).
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