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Pros and cons of investing in structured products
Structured products from HSBC bank. Explore both sides.
Pros and Cons
For some products, the structure may be quite complex including many factors ranging from tiered rates of return, to the ability for the investment to mature early if the underlying rises or falls below a particular level. It is important to thoroughly understand how the investment performs under various market situations, including the risks.
The terms of the structured product, which include the degree of capital protection* and the risk and return characteristics, are both fixed and transparent. Unlike a managed fund, investments in most structured products are not exposed to a particular manager's style or ability, unless of course, the underlying is a managed fund.
Investing in structured products comes down to a trade-off between an investor's desire for higher returns and their attitude towards risk. Capital preservation is an attractive element of structured products, but it does reduce the ability to benefit from the higher returns that can be made in a strongly rising market, such as shares and property. The cost of capital protection* may limit the upside returns, but it also limits the downside to the repayment of the initial investment amount at maturity.
Investments can be designed to provide capital growth, income or a combination of both. Structured products can also be designed to provide positive returns even if the direct investments in a market would have produced a loss and could also deliver income returns greater than deposit products or accounts. These outcomes can be provided with the comfort of capital protection* as long as the investment is held until maturity.
Structured products are designed to be held until maturity for the capital protection* to apply. If the investor requires this money at short notice, then the redemption of the investment could involve a significant capital loss and may also involve some early termination charges. Due to the costs and time involved with redeeming some structured products, some issuers also impose additional restrictions, such as monthly redemptions. In some situations it may take 6 to 8 weeks for an investor to receive the proceeds from the redemption.
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Important Information
* Capital protection only applies at maturity or in the instance of a Call Event and provided no Early Termination Event has occurred. If the investment is sold before the Maturity Date or there is an Early Termination Event, the investor may receive an amount less than their initial investment amount. The capital protection is also subject to the creditworthiness of the Issuer.
