Is structured product a good solution for the current crisis

  • By David Molnar
  • February 4, 2018
  • Comments Off

9 February 2013

If you are looking for alternatives to bank deposits, we recommend structured deposits. The so-called structures are particularly often used by people who have private banking services. It can therefore be concluded that this type of investment is chosen by those with more capital and less risk aversion. However, this may change in the near future as it pays to diversify investments in times of crisis.

Structured products are flexible because on the one hand they protect the capital invested – just like standard savings products – and on the other hand they allow a high rate of return to be achieved – just like investment products. High returns on structured deposits can be achieved through the use of derivatives, which in turn use a leverage mechanism. The capital guarantee, in the case of structured products, is based on the investment of part of the funds in risk-free instruments. For this purpose, e.g. bonds or standard term deposits are used.

A structured investment is based on the underlying instrument. This could be, for example, a stock market index or exchange rates. This construction of a structured product allows for investment in new markets which were not previously available to the customer concerned. It also reduces risk by diversifying the portfolio. Deciding on a structured product we can also count on safety, so that this type of deposits can be a safe haven in times of economic downturn.

Structured products are medium to long-term investments. Profits on a structured investment are difficult to determine at the outset, as the financial result is affected by many variables. The value of the underlying on which the ‘structure’ is based has the greatest impact on profits.

Structured deposits are built from a combination of a profitable investment product and a safe savings product. One of the safe financial instruments used to create structures is an insurance policy. Such a combination guarantees an exemption from capital revenue tax. An example of a structured insurance product is an investment policy or a policy known as a policy deposit. Other financial instruments used in structured deposits are: certificates of deposit, corporate bonds, term deposits.

The greatest advantages of structured deposits are considered to be their great possibilities in the choice of the underlying instrument. This in turn makes it possible to match the structured position to the customer’s preferences. The Client may choose: the type of market on which he will invest; the time horizon of the investment and the proportion of the capital employed in particular instruments. Protection of capital against its loss is another aspect increasing the attractiveness of structured deposits.

Before choosing a structured product, it is first of all necessary to find out what the structure of a given offer looks like. Also important are the costs that will be associated with investing in structured deposits. The most important cost item is the commission, which is charged once at the beginning of the investment and amounts to no more than 3% of the total capital. Another aspect worth highlighting is the amount of the guarantee, since the total amount of capital invested is not always guaranteed. In addition, you need to be aware that a structured investment is a medium- to long-term investment, which means a longer commitment of capital. This is usually a period of more than 12 months. Early withdrawal of funds from a structured deposit may result in the loss of profits and sometimes even additional commissions. The last thing worth noting is the investment risk. It should be analysed whether it is adequate to the potential return on the investment.

A structured deposit is a good alternative to term deposits or bonds. However, you should be aware of all the advantages and disadvantages of this type of product. It is worth noting, however, that structured deposits provide great flexibility in investing savings and high profitability, which is not possible with standard bank deposits.

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