Structured products try to give investors the best of both worlds by offering the rewards of potential growth while protecting capital.
They are like Marmite for many investors – some love them and have seen great returns, while others see them as too complicated and risky.
Investors should consider structured products if they are generally wealthy and financially sophisticated with a good appreciation of the risk involved.
What are structured products?
The name is financial jargon, but sitting behind the name are three separate investments – straightforward structured products, capital protected products and capital at risk products.
As the names suggest, each performs differently.
Structured deposits are investments that behave like bonds rather than savings although they offer a fixed return over a set term, generally between three and six years.
They also work like a tracker, with returns rising and falling in line with the underlying benchmark investments.
These investments can be shares or commodities, such as gold or oil.
Regardless of how the benchmark performs, investors should get all their initial investment back at the end of the term.
If the investment turns sour, structured products have the safeguard of protection under the Financial Services Compensation Scheme (FSCS).
Capital protected structured products
These are more or less the same as standard structured products – the specific difference is they have no FSCS protection.
Capital at risk structured products
The potential rewards are higher with capital at risk structured products, but the downside is if the benchmark investment fails to perform, investors will lose some money.
Structured product drop trigger
Many structured products come with a built-in guarantee to minimise losses that kicks in if the benchmark investment drops in value by a set percentage – usually 50% less than the benchmark performance on the day the structured product was opened.
The way this works is called ‘1:1’ – which means if the benchmark drops 50% then the investor loses 350 for every £100 invested.
Some structured products have an ‘auto call’ feature which ends the contract when the benchmark moves by a predetermined level. If this auto call is triggered, the investor is repaid their initial stake plus any gains due.
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