Structured products can be any one of a wide range of investments and can offer income, capital growth, or a combination of both. Most structured products tend to be open to new investment for a short period of time. Your money will then usually need to be tied up for between one and ten years. Some structured products offer full capital protection, but others offer partial or no capital protection.
Structured products are often complicated. You should seek professional advice if you are in any doubt about the potential risks and returns involved.
You could lose some or all of the money you put into these products, so make sure you understand the risks before investing.
How do they work?
Structured products offer returns based on the performance of underlying investments. Many products are linked to a stock market index such as the FTSE 100, Nasdaq, or EuroStoxx50. The underlying investments may involve different firms based in various countries.
A typical structured product will have two underlying investment components:
- a note – (a type of debt security). This component is used to provide capital protection. It may pay interest at a specified rate and interval, and may repay some or all of your original money at maturity; and
- a derivative – (a financial instrument linked to the value of something else, such as a stock market index or the price of another asset, such as oil or gold). This component is used to provide the potential growth element that you could get at maturity. Investors are usually offered only a share of any increase in the level of the index or asset price which occurs during the term of the investment.
What about structured deposits?
Some structured products are deposits rather than investments. Structured deposits (often marketed as “equity linked deposit accounts”) can only be offered by banks which are able to accept deposits. Your money is treated as if it is in a restricted-access bank account but, unlike a traditional savings account which pays a fixed rate of interest, the interest you receive will depend on the performance of a stock market index or asset.
Key risks and product features
You could lose some or all of the money you put into these products, so make sure you understand the risks before investing.
The following list is not exhaustive and not all risks or features are applicable to each type of product.
- Credit risk – a product may be designed and marketed by a “plan manager”, but the returns and guarantees are generally provided by a third party. If that third party goes bankrupt, you could lose some or all of your money, even if a product is called “protected” or “guaranteed”.
- Market or investment risk – if the return of your original money depends on the performance of a stock market index or asset, then if the level of that index or asset falls during the term of the investment you may lose some or all of your original money. If this happens, you could lose your original money very quickly.
- Liquidity risk – the benefits offered (such as capital protection) are usually only available if the product is held for the full term. It may be difficult or expensive to access your money before the end of the investment term.
- No dividend income – even if a product is linked to the performance of a stock market index, you will not receive any dividend income from the companies which make up that index.
- Capped returns – many products restrict or cap the level of the return you can receive, so if an index or asset price rises above the level of that cap, you do not receive additional returns.
- Averaging – the return offered by some products can depend on several measurements of index levels or asset prices during the life of the investment. While this can protect you from short-term falls in an index level or asset value, it may also prevent full exposure to any gains.
- Limited participation – many products only offer a proportion (for example 50%) of any gains made by the index or asset to which they are linked.
- Inflation – even where a product is marketed as “100% capital protected”, the real value of the capital can suffer significant erosion by inflation over the term of the investment.
- Tax – the tax treatment of structured products depends on their legal structure and on any tax wrapper in which the product is held.
Some “capital protected” products may not be covered by the Maltese Depositor Compensation Scheme if the bank holding your deposit goes bankrupt. Your bank should disclose this information to you at the time you are offered this product. Check the documentation which is given to you for reference to the Depositor Compensation Scheme and whether the product and the bank are covered by such scheme.
Structured products are often complicated. You should seek professional advice if you are in any doubt about the potential risks and returns involved.
