Introduction
In today’s dynamic and tech-savvy world that we live in, the field of investments and finances is also changing on a phenomenal note indeed.
We have new and vivid investment products that are getting added to the table every single day. Just a few decades back, investors only had two options to choose from:
- Equities or stock trading and
- Dealing with bonds or fixed-income securities
Now, we have more dynamic and attractive products that the younger generation of investors thrive on. Do you know what has caused this particular spike?
The rise is due to the arrival of structured notes or what is commonly known as structured products. Structured notes are hybrid products that comprise bonds and equity. These are products that can easily be customized to suit individual investing preferences.
As the notes contain bonds and equities, you can include stocks, shares, fixed-income bonds, credit notes, commodities, or currencies to form innumerable number of permutations or combinations on your financial portfolios as such.
This way, you can create multiple products that can be tailor-made or curated to suit specific financial objectives you have in mind. You can choose your underlying assets, tenor periods, and rates of return you expect from diversified investment portfolios by including structured notes in your wealth basket.
On this parlance, let us identify the Key Benefits Of Structured Notes on a comprehensive scale indeed. Helping you get started here:
Customization at its best level
When you choose structured notes, you can avail customization at its superlative level indeed. This is because you can underlie stocks, equities, currencies, and commodities to the notes.
An investment advisor sits with you and discusses your financial objectives vis-a-vis your halo investing options on a one-on-one basis. He further analyzes the kind of risk tolerance you can take under your financial belt. It is then that the asset allocation is done for you as such. As the risk profiling is different for you or any other investor, you avail customized investment solutions that align with the immediate, near-future, or long-term financial objectives you have in mind.
Therefore, choosing structured products to form a major portion of your investment portfolio allows customization at its best level indeed!
Comes to you with ample downside protection
Structured notes come to you with ample downside protection. You can incubate ‘call’ or ‘put’ options on your futures so that you can play your moves or nuances according to your intuitive or analytical frame of mind.
Similarly, you can choose principal protected notes that give market investors with an overall outlook of changing market volatility. At the same time, you get your capital money back.
You can choose notes that offer hard-core or soft-core protection nets. This way, you would get partial or complete protection over your capital wallet.
Likewise, risk-averse investors have multiple levels of protection the structured notes may offer them as such.
Discovering an enhanced level of yield potential
As structured notes comprise an optimal mix of debt and equity, you can also get multiple sources of income from notes. You can get regular interest earnings or coupons with 100 percent capital-protected notes. Therefore, we call them income notes.
With equity-enabled notes or ELNs, you expect growth. Also known as growth notes, you get coupons, dividends, and other forms of capital earnings. With assets performing well in the market, you can therefore cash in on them. Alongside, the notes can be called digital notes as you perform most of the structured notes 101 formalities via online mediums as a matter of fact.
In a nutshell, investors receive multiple channels of active cum passive earning potential from investing in structured products.
Helping you with an advanced form of diversification
Structured notes comprise a mix of bonds, equities, ETFs, credit notes, stocks, high-paying securities, currencies, derivatives, commodities, or mortgage notes. You name it, you have it!
Under one structured note, you can underlie 3-4 types of assets. Therefore, when you invest in multiple types of notes, you can build an exponentially magnified form of diversified income cum wealth generation portfolios.
By building a diversified income portfolio, investors can leverage profitable investment options offsetting losses in one or the other investment tool. This way, your investment portfolio grows even during adverse market conditions as against you investing with stand-alone equities or bonds.
Access to non-standard asset classes
Structured notes help you underlie your notes with non-standard asset classes too. This is because, you get an opportunity to invest in foreign currencies, market derivatives, or futures without directly purchasing or investing into each of them.
As an investor too, you get an opportunity to witness different market scenarios like the currency markets, stock exchanges, and even the bonds market.
This way, you get great access to non-stereotyped investment options without making direct investments into each one of them on a stand-alone basis.
Potential to capitalize on market volatility
As an investor in structured products, you get an undue advantage to deep delve into the market volatility or witness specific movements in the market regular investors might not be able to have access to.
Therefore, you get a lucrative opportunity to access different types of marketplaces like:
- Stock exchanges
- Currency markets
- Credit markets
- Secondary markets and
- Primary markets for posh and institutional or High-Net-Worth or HNW retailers
This is a great and underdue advantage a structured note holder has over someone who has invested his money into regular streams of income like mutual funds, stand-alone bond issuing firms or the equity market. This way, you become a more versatile and seasoned investor over a relatively shorter span of time.
Determining tax efficiency
When you aim for capital-protected protected government bonds, you can receive tax waivers if the local bodies or local jurisdiction allows you to do so. Or, you can convert the income you earned from structured notes into capital gains so that lower tax slabs are implied on the same.
However, tax laws or tax implications vary greatly from one geographical domain to another.
Therefore, it is always in your best interests that you consult a tax advisor or financial advisor to know how tax implications can impact your earnings on different structured products.
Better investing advantages over traditional assets
When you invest in notes, you get a versatile degree of access to different types of financial products. These include stocks, credit notes, market-indexed products, currencies, derivatives, commodities, or futures to name a few.
Therefore, if you develop good observation skills, you can utilize your learnings towards getting multiple channels of income sources from different asset classes that underlie your notes.
The initial investment might be a little higher owing to the level of customization the designer has to incubate in having them customized or tailor-made for your growing capital needs. However, once you get hands-on with a variety of notes having different underlying assets, they turn cheaper and help you with an economic advantage over investing in traditional bonds, fixed-income securities, or stand-alone equity.
This way, your investment portfolio grows more exponentially over traditional investment options and you can align your wealth basket to meet your immediate, medium-term, or long-term financial goals quite seamlessly.
This way, you stay relaxed from financial stress and get a superlative level of freedom from stress or tension, and this is something your regular peers might not have hands-on with.
Different types of structured notes to choose from
Let us have a run-down into different types of structured notes that you can ideally choose from. Helping you get started here:
Principal Protected Notes or PPNs
Principal Protected Notes can be abbreviated as PPNs. Here, you can underlie bonds, government-aided mortgages, real-estate securities, corporate bonds, and other capital-protected assets. You get stable rates of returns and a brief outlook on market volatility. This is a 100% capital-protected product wherein investors are guaranteed a 100% return on their seed capital money despite changing market conditions.
Equity Linked Notes or ELNs
Equity Linked notes can also be abbreviated as ELNs. With an ELN, you might not receive 100% capital protection. The notes underlie equity-based assets like high-paying securities, shares, stocks, derivatives, and commodity futures. If the market performs well, investors get potential returns on investment and receive their capital back. However, if markets do not perform well, the linked-in assets suffer losses and therefore investors might lose their returns on investment or even have to let go of a partial or complete sum of their capital investment amount.
Auto Callable Notes
Auto Callable Notes have an auto call facility that product issuers embed the notes with. The assets of the notes get observed at specific intervals of time. And, when assets reach their specified barrier levels, the notes get auto-called and investors receive their capital and coupons even before their term of maturity the notes are backed with.
Reverse Convertible Notes or RCNs
Reverse Convertible Notes can be abbreviated as RCNs. The notes have underlying equity assets. These assets are monitored under initial pricing movements vis-a-vis their overall growth or propensity over the tenor of the notes. The investor gets principal plus interest earnings if the assets reach their pre-determined levels. Otherwise, the notes convert into equity shares as curated by product issuers. However, a specific formula applies when the product-issuing firm converts each investor’s capital money into a specific number of shares. The investor can sell these shares later at a secondary market on a profit margin to redeem the seed capital investment money as such.
Knock Out Notes
Knock-out notes that have a knock-out facility that gets embedded in them by product issuers of the same. Specified knockout levels are achieved on the notes for them to automatically redeem for the investors.
Knock in notes
These are notes where a specific knock-in price gets embedded on the notes. Only when the notes achieve the specified knock-in do the notes trigger traction and are considered to actively operate inside the investor’s account.
The Bottom Line
Structured notes can be pre-designed by the investor and the product designer by sitting and discussing the various norms hand in hand. The investor discusses his financial norms with structured note firms or with independent wealth management practitioners to get the notes designed or curated for them as such.
This level of customization helps the investors align the notes to suit their financial interests on a longer run which is why these notes have spiraled the growth of a larger number of financial products that revolve in today’s market.
What are your thoughts on this? Do mention it in the comments below!
Frequently Asked Questions or FAQs
What do these notes provide investors with?
Answer: The notes can provide investors with
a. principal protection
b. soft protection against capital eroding
c. downside risk protection
What are index notes and what do these notes offer?
Answer: The index notes are notes that are subject to change based on market indices. These notes may not be suitable for highly fragile or risk-averse investors as market indices can indicate the growth potential of linked-in assets while non-favorable market indexes can allow the notes to fall below the capital investment value of the notes.
Here, the coupon payment or risk-reward market risks are on the higher edge for investors. The investor should consult an experienced financial advisor or a banking corporation before signing in on the dotted lines.
Do structured products offer enhanced upside participation for investors?
Answer: No, certain tabs or ceiling limits are added by product issuers on structured notes and they do not offer enhanced upside participation for investors as compared to what stock markets offer for investors. At the same time, while there are tabs or ceiling limits on the potential gains the notes offer, you would also get ample protection net against extreme downside risks the volatile equity products are subject to. Therefore, the notes are well-balanced investment options for investors to choose from.
Can investors buy or sell notes easily?
Answer: Changing interest rates, enhanced degree of customization, and complex structures of notes make them a little illiquid in nature. However, you can sell the notes to your product issuers if they are willing to at least offer you your capital returns plus a modest rate or returns. Or, you can sell them inside secondary markets too.
