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Volatile equity markets make structured products attractive

Priya Nair

Mumbai, April 20 As equity markets become increasingly volatile, there is more demand for structured investment products from high networth investors (HNI), as these offer relatively more stable returns.

Structured products are good for customers unwilling to take high risks. The minimum amount for investing in such structured products is about Rs 10 lakh and the maturity period is usually three to five years.

These are in the form of non-convertible debentures and listed on the NSE, governed by SEBI guidelines.

According Mr Sharad Sharma, Country Head (India), BNP Paribas Private Banking, “Given the prevailing sentiment in the equity markets, investments have slowed down marginally. Meanwhile, structured products have gained currency as they offer higher stability.”

Plus points

These products are issued by NBFCs and banks distribute them to their HNI customers. The advantage of such products is that it is possible for the investor to get a guarantee for the entire capital or a part of it. If an investor is prepared to take a product which offers part capital guarantee, then the issuer will be able to offer him higher returns, said a banker.

In case of a plain equity investment for a three-year period, there is the possibility that investors can end up getting less than the principal amount. But in a structured product, where the capital is guaranteed, there is no downside, said Mr Kanwar Vivek, General Manager, Wealth Management, ICICI Bank.

He said, “Capital guarantee products are products that can sustain one bad cycle. These structured products are mainly non convertible debentures or are linked to Nifty. We had moved into such products just two months prior to the crash in the equity markets.”

Investment pattern

Assuming that the product is linked to Nifty, the issuer may promise that if the Nifty gives 100 per cent returns, then the structured product will give 105 per cent. To ensure this, the issuer invests part of the money in risk-free fixed deposit.

The balance will be invested in equities or other high-return instruments. The capital can be protected from the portion invested in the fixed deposit, even if the market falls. In the normal circumstances, the investor in any case will get higher returns — the interest from the fixed deposit plus returns from the equity.

The product can be linked to Nifty, or a single stock or a basket of stocks. It is the issuer who comes up with right benchmark market indicator, depending on the prevailing market conditions.

Structured investment products were introduced less than two years ago and are slowly gaining popularity, said bankers. “The variety in products continues to grow and the underlying investments and structures may vary considerably. Given the market conditions, and as structured products evolve, there is a growing acceptance of these products among clients. We believe the appetite for these products is here to stay,” Mr Sharma said.

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