 |
THE environment nowadays is fast changing, making investors pursue greater benefits from a product that can give them higher returns.
Today, investors are equipped with the ability to stay alert to any movement in the market. This stems from easy access they have to information needed in making investment decisions, and this is what keeps them ahead in securing profit gains and minimising losses.
As investors become more sophisticated, they are more informed of various investment options, the basic asset classes of cash, equities and bonds are no longer sufficient to fulfil their needs and return expectations.
In meeting the expectations, financial institutions come up with various new products that offer high returns.
If you have been monitoring the banks over the past five to 10 years, you will notice the changes in the products they offer. These products have evolved from just simple fixed deposits to various alternative financial products, and one of the latest offerings that is fast getting the attention of the public is structured products.
What are structured products?
Under the Securities Commission's Guidelines on the Offering of Structured Products, "structured product" means any investment product that falls within the definition of "securities" under the Securities Commission Act 1993 (SCA) and derives its value by reference to the price or value of an underlying reference.
"Underlying reference" means any security, index, currency, commodity or other assets or reference, or combination of such assets or reference.
In simpler words, structured products are basically alternative financial instruments or securities, the performance of which is linked to underlying assets such as security, index, currency, commodity or other assets or a combination of several underlying assets. Structured products are usually classified according to the underlying assets that it is being indexed to.
Below are some examples of structured products that you can find in the Guidelines on the Offering of Structured Products:
* Equity Linked Notes
* Bond Linked Notes
* Index Linked Notes
* Currency Linked Notes
* Interest Rate Linked Notes
* Commodity (Contracts) Linked Notes
* Credit Linked Notes
With the regulatory liberalisation in Malaysia, structured products that were once only available to institutional investors and high net-worth individuals are now accessible to the mass market through structured investment, such as Floating Rate Negotiable Instruments of Deposits (FRNID), which have a minimum investment amount of RM100,000 (under the guidelines of FRNID by Bank Negara Malaysia), structured unit trust funds, which have been allowed to invest in structured products only since May 2006, and capital-protected, investment-linked insurance that invest in FRNIDs or structured products.
Structured products usually have a fixed maturity, with two components, a note and a derivative. While a note provides for periodic interest payments to the investor at a predetermined rate, a derivative component provides for the payment at maturity.
A key feature of most structured products is a "principal guarantee" function which offers protection of principal, if it is held to maturity.
For example, if you invest RM100, 80 per cent of it might be used to purchase a risk-free fixed- income securities or money market instruments, which will give RM100 in five years. The remaining 20 per cent will be invested in a financial derivative, which will provide the additional benefit that is being targeted in the investment strategy.
One of the most prominent benefits of structured products is the flexibility to provide tailor-made products according to investors' risk and return profiles. As the products are not standardised, they can be customised to meet an investor's objective of enhancing return with limited downside risk in rising or falling markets, using capital guaranteed structured products.
For the more aggressive investors, they can choose to invest in non-capital guaranteed products which have higher return potential at higher risk and without downside protection at maturity.
As the performance of the embedded derivative of a structured product is linked to its underlying asset, the biggest risk factor in investing in it is the change in the asset value. Such change can be quite volatile and complicated as some structured products are based on a combination of a basket of underlying assets.
Even if some of the products offer 100 per cent capital guarantee, you still have to deal with the risk of potentially losing all of your money if the issuer defaults. Here, the recent Lehman's debacle makes for a good example.
In addition to this, due to its fixed maturity, you may lose part of your capital, depending on the market situation as it will be marked-to-market.
As an investor, structured products can certainly help enhance the returns of your investment portfolio. This, however, requires you to do your homework.
As with any other form of investment, it is crucial that you fully understand the various types of structured products before investing in them.
Structured products can be rather complex, as such, make sure you know them well so as to manage your risk; give careful thought to the risk inherent in this type of products versus your own risk profile. This is especially important if you are currently a retiree or depending on your savings for some urgent needs.
Remember, "Every choice you make has an end result" - Zig Ziglar. So, make your choice wisely, not blindly!
This article was written by Securities Industry Development Corporation (SIDC) to educate investors on smart investing. The information provided is for educational purposes only and should not be used as a substitute for legal or other professional advice.
SIDC - the leading capital markets education, training and information resource provider in Asean - is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.
For more tips on wise investing, log on to www.min.com.my
No comments:
Post a Comment