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Investments can have too much structure

By John Hayward
This article is published on: 24th February 2014

What are structured products?

Structured products are usually set up as an investment of a lump sum in exchange for a return based on the performance of an underlying index such as the FTSE100. They are arranged as fixed term contracts of, normally, 5 to 6 years although some can pay out earlier under certain circumstances. They can be bought from a variety of sources and are particularly popular with banks.

Structured products could be suitable for someone who is willing to buy and hold, understanding that if markets fall sufficiently, then the return could be less than what was paid in. Some structured products offer capital guarantees. This ´promise´ of the return of your initial investment can be somewhat veiled in that the guarantee could be based on the particular underlying index not falling below, say,  50% of its starting level. For example, the initial investment is made and the FTSE100 and that point stands at 6000. 5 years later, the end of the contract, the FTSE100 is at 5700. In this case, the client would receive the full initial investment even though the index level has fallen. Some suggest that the FTSE100 falling by 50% is not likely thus selling the product as risk free. The FTSE100 certainly has fallen by more than 50% in the past (eg. 1999 to 2003).

The people offering any guarantee could be a third party. This is where we have another level of risk, known as counter-party risk. If the third party fails then the guarantee could be worthless.

Another risk is people wanting to access their money before the fixed term is up. The problem is that these products often have no secondary market which could mean you may not be able sell it without suffering a significant loss.

As with all types of investments, there are varieties on a theme, some suitable, some not, depending on one´s risk profile. Complete understanding is essential from the outset.

For more information on how we can protect your savings whilst offering low risk, liquid investments, contact one of our advisers.

Article by John Hayward

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