Understanding structured products
Structured products are available in different forms and investors need to understand them well before deciding on a particular course of action, writes Arnav Pandya.india Updated: Aug 28, 2008 21:57 IST
Structured products are available in different forms and investors need to understand them well before deciding on a particular course of action. Now even mutual funds have brought out schemes that match some of these features.
An investor should have a clear idea of risks involved in this process and what the position will be if things do not work out as planned.
The most commonly offered products aim to ensure that the return of capital is guaranteed. These instruments come in different forms and the simplest ones set a target period when the initial amount is returned o the investor.
The aim is to try and give investors the upside of the equity market and protect them from the downside. This is usually done by investing a large part in debt that will equal to the total amount of funds at the end of a specified period. The remaining amount invested in equities tries to get the upside for the investor.
Focus on aim
The process observed by these funds makes it look like the capital is guaranteed, but there is a hitch. Such an objective is not promised by the fund.
All that is said is that they will try to ensure that this objective is achieved. There might be a problem in the way, which could include a situation where the debt securities held by the scheme face a default. Or, there might be other reasons such as delayed interest receipts and even a write down. In such a case, the objective might not get achieved and the investor would find himself facing the risk.
Investor bears loss
What happens if the target is not achieved and there is a shortfall for the scheme? This can happen when the value of the net asset value falls below expectation. But, will the fund make up for the shortfall?
The simple answer is that in such a situation the onus is on the investor and no one else. They will get the gains if they occur, but if things do not work out as expected and there is a shortfall then it is they who will have to bear the loss. So there is no protection present in this sense of the term too.