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Structured Products are designed to meet unique risk-return objectives. These objectives are achieved by taking conventional underlying assets and replacing their usual returns with non-traditional payoffs from other underlying assets.
Fundamentally, the returns from structured products are linked to traditional returns from underlying assets. However, they are combined with swaps, futures, and other derivative products to leverage higher participation in case of an upside or a downside. Structured Products offer the flexibility to the investors in choosing a customized payoff that typically is a combination of fixed and variable market linked return over the period of the investment suiting their own risk-return objectives with efficient tax planning. Structured products in India are often linked to NIFTY performance and downside protected up to the capital deployed (however not necessarily always).
Let us assume we invest Rs. 100 in a straightforward, structured product offering capital protection. The investment horizon you have in mind is 3 years. Rs. 77 out of 100 is invested in a debt instrument whose value at the end of the maturity period is Rs. 100.
The remaining Rs. 23 of the amount can be employed in purchasing partially in another asset class and partially in derivative instrument. Let us say in this case, entire Rs. 23 is invested in a call option on NIFTY. You pay a premium to buy a call option on NIFTY at the end of three years at the current price. You buy two options as the premium is priced at 11.5 giving you access to two times the NIFTY returns at the end of the duration.
At the end of the tenure, the debt portion of the investment has matured to Rs 100. The NIFTY generated 20% returns over the three-year window. These returns imply that the call option reaps Rs. 40. The total return on the maturity of the structured product is Rs. 140. However, if the NIFTY falls below the level of investment made today, no value is returned from the derivative and the fund generates only Rs. 100 with the capital protection clause.
Thus, in this illustration, if there was no capital protection clause and the underlying derivative lost value, the investor could also lose the principal money invested. In this case, there is a notional loss of interest which the investor could have earned by investing in any other instrument for the same tenure.
Structured Products in India offer retail investors easy access to derivatives. Given today’s volatile markets, these products allow investors not only to survive, but also gain from its volatility.
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing.
