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Are structured products good enough?
Personalfn.com | August 12, 2008 11:42 IST
Amidst the stock market volatility, it is not surprising to find investors who have all but redeemed their investments. Considering the losses incurred, investors are now exploring investment opportunities in avenues beyond equities. These avenues even have a fancy name - structured products.
Structured products, is the latest buzzword among investors and fund houses alike. Many investors are enticed by the investment proposition offered by these products. Fund houses on their part are only willing to launch more products to feed their popularity among investors.
Most investors believe that structured products are designed in a manner that equips them to deliver superior returns. Besides, they also consider them to be less risky.
Before we explore this subject further, let us first understand what structured products are. As the name suggests, these are customised products that comprise of various financial instruments (derivatives, stocks, bonds and debentures, among others) and investment strategies in one investment.
These products were initially made available to cater to the needs of a specific group of investors (mainly high net worth investors). However, they are now being offered to retail investors as well. To that end, the concept of structured products is relatively new for retail investors.
Terms like derivatives, paired trades and equity-linked debentures among others, have enticed a lot of investors into investing in these products. A strong marketing pitch by fund houses combined with fancy terms/investment strategies leads them to believe that structured products are superior to regular mutual funds. However, there are certain elements that investors need to consider before investing in structured products.
While the advantages offered by structured products are widely-advertised, investors would do well to understand their downside in order to make an informed investment decision. We put forth some of the disadvantages associated with structured products.
For example, a 15 per cent return (in absolute terms) over 2 years would actually mean 7.24 per cent CAGR over a similar time frame. However, if investors are being led to believe that the structured product will yield a 15 per cent CAGR over a 2-Yr period when it's likely to deliver a 15 per cent absolute growth over a 2-Yr period, it's a case of misrepresentation. To that end, comparing such returns would lead investors to making a wrong investment decision.
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