Introduction
Quite a lot of investors are skeptical about investing in structured notes. This is because of the misconception people have that structured notes are too complex and hard to learn or understand. This misconception is something that needs to be handled with a pinch of salt.
You must understand one thing here. Just because something is complex or hard to understand, it doesn’t mean that thing has to pan out ineffectively for you. That primarily explains why you must consult your financial or wealth manager to learn about how different investment products work and function. You must understand if there is a conflict of interest between the investment plan you may want to zero in on and between the financial goals or objectives you have in mind.
On this note, let us unveil market trends influencing structured notes on a global level while we would also like to touch down with the basics behind how structured notes work or operate.
What Are Structured Notes- Meaning And Conceptualization Explained
Structured notes are products that are designed to help your money grow or accumulate at a steady pace even while protecting your capital investment.
These notes have an optimal proportion of debt and equity. The debt protects the principal money of the investor while the upside gains of the notes are proportional to the performance of the underlying equity-based assets, these notes have been linked with.
Here, the asset allocation comprises equity shares, stocks, bonds, credit notes, a basket of high-paying securities, and currencies, to name a few. That primarily explains how wealth managers or investment bankers can curate multiple varieties of notes under the same umbrella namely ‘Structured products’.
These notes lend attractive returns to investors while they also offer various levels of capital protection to the investor’s principal fund. You earn regular coupon payouts from the underlying asset or a group of assets these notes are linked with. And, with different levels of capital protection, the notes provide principal protection against falling market conditions.
How Do Structured Products Typically Work?
Structured notes are not meant to exponentially raise your investment portfolio by leaps or bounds. Neither are they designed to make you earn potential losses. , the valuations are not done by the Securities and Exchange Commission but by private bankers concerning structured notes.
These notes are potentially designed to moderate or mitigate losses and gains for the portfolio. With an even simulation of caps, floors, barrier limits, and spreads that are set on the notes, the investor can leverage his portfolio in a more regulated or streamlined manner.
The notes are modeled to protect your principal fund against capital loss or investment erosion. At the same time, you get attractive returns from the performance of underlying assets the notes are linked to. This is done via leveraging methods that are structured for notes during the time of their maturity periods.
In the long run, the portfolio earns returns and capital even in adverse market scenarios. So, in a way, structured investment holders do not worry much about the volatility they have in market conditions as direct investment holders in equity markets have.
What Are Market Trends Influencing Structured Notes- Factors Explained
These are the market trends that are influencing structured notes as of today. Let us have a run-down into what they are:
- Interest Rate Environment
Fluctuating interest rates can have a potential bearing on how much yields or returns a structured product can make. When the interest rates are lower, then structured products earn better yields over traditional bonds or fixed-income securities. However, when interest rates are rising, the yields from structured notes become less attractive as compared to bonds or other traditional forms of investment.
- Economic Uncertainty
Market volatility is also another major concern for investors who invest their money in traditional bonds or direct investment funds connected with equity. Structured products are more favored here as they protect investors’ capital funds against rising or falling market conditions. Technically, rising or falling markets are also known as bearish or bullish market scenarios. Investors therefore find an increased demand for notes as they not only offer capital protection but also provide risk mitigation.
- Inflationary Concerns
Inflation related concerns prove a rip-off for investors who may want to invest in traditional bonds or fixed-income securities. Structured products, on the other hand, can be customized via independent financial managers or via product issuing firms to include inflationary protection clauses on the notes. This way, the products give a steady source of income and protect the capital portfolio despite inflationary pressures that the global economy throws up from time to time.
- Regulatory Changes
New Governments may form or existing governments may dissolve. When this happens, the economy throws up a new set of rules or regulations that apply to financial products. Investment portfolios are redesigned as per the newly released statutory guidelines or regulations of the newly formed governments. Therefore, investors may hover around regularly tradable broker-dealer investments with a higher degree of skepticism as the regulatory changes may throw a whole lot of amendments in investing guidelines or norms. Structured notes can be preferred options here as product issuers can apply regulatory over-riders that save investing portfolios from further erosion or degradation.
- Technological Advancements
Technological advancements have played a pivotal role in shaping the structured products industry on the whole. These were investing options that were primarily available to high-end institutional and segmented retail owners who were posh investors. Now, with so many technologically advanced tools and AI options, the pricing of structured products has drastically reduced to include middle-class retail investors too. Hence, technological advancement is the latest market trend that is favorable to helping the structured note industry hit a trillion-dollar mark.
- Investor Preferences And Improved Market Demographics
As structured products are highly customized concerning the choice of assets the notes must have, tenure period the investor can have hands-on depending on whether he is looking for an investing portfolio that can satisfy his financial goals and objectives on a short-term/ medium-term or a long-term scale and also determining the rate of returns he should earn on the investing portfolio, this industry is growing higher and higher indeed. Gen Z millennials are getting attracted to structured notes as you have portfolios tailor-made with innovative and captivating investment strategies that regular investment portfolios may not offer you as such.
- Geo-Political And Economic Trends
The economy can throw up a global recession scenario when economic factors such as alarmingly rising interest rates camouflaged with growing rates of unemployment, cause economic unrest even amongst highly developed economies of the world. Rising tax implications can also have a potential bearing on how much a regular investment portfolio earns through the term of the asset. Therefore, there are a whole lot of geo-political and economic trends that can alter how different financial products work across the growing economies of the world. Structured notes are preferred here as they comprise caps and floors to mitigate profits or losses even in adverse geo-political or economic scenarios. Therefore, structured products can lend attractive investing options even if the geo-political or economic scene is adverse and this is not the case concerning bonds, investment funds, or equities that are regularly traded in the market.
What Are The Lucrative Benefits Of Structured Notes?
These are the lucrative benefits investors enjoy with respect to structured products or notes. Let us have a run-down into the same:
- The Highest Degree Of Customization
Structured notes have the highest degree of customization as investors get to choose what assets must be underlying within the notes. They can also choose the rate of investment the portfolio must earn throughout the term of the asset. Likewise, you can also have the portfolio tailor-made to suit your frontal objectives of short-term/ medium-term or long-term financial goals and objectives.
- Customized Payouts
Structured notes provide customized payouts depending on the income-generation or wealth-generation objectives that investors have on the whole. You can choose notes that support downside protection and still provide you with access to generate higher income levels. These are income notes.
Traditional investors who are used to receiving quarterly, half-yearly, and annual earnings can choose coupon payouts that structured notes can provide you with.
For the more dynamic investors who love the adrenaline rush of seeing their assets fall or rise can opt for growth notes wherein potential gains are linked to the performance of underlying assets these notes are linked with.
Likewise, you look for customized payout options that can suit the independent requirements of every individual investor. Here, you get higher returns if markets are spiraling and optimal returns with low-down market scenarios.
- Wider Market Exposure
As you have already seen, structured notes are hybrid notes comprising debt and equity. The bond that is issued in the name of the investor protects the investor’s principal or capital investment while the upside income-earning potential of the notes is linked to the underlying assets the notes are linked to. Therefore, investors get wider exposure to different market segments through investing in notes.
- Better Rates Of Returns
Structured notes not only provide investors with more attractive payouts but also help you mitigate adverse losses when the markets are thoroughly down. This is because the products have floors, caps, and different levels of protection to safeguard investor’s capital or principal investment. And, since the notes are linked to underlying equities, stocks or currencies, favorable market conditions can help the investment portfolio earn attractive payouts over the regular yields you get from bonds or fixed-income securities. Some of the notes allow investors to convert their investments into stocks or shares of underlying firms when the markets are not performing well.
- Time-saving Initiatives Made Available Via Notes
Structured products can be curated even to meet the short-term or medium-term financial goals of investors. Autocallable notes are a classic example of the same. These notes can be auto-called by product issuers as the prices of underlying assets reach the par values or above values of the initial strike rates. The assets are observed during specific observation days and coupon payments are made to investors post every observation. Once the assets reach their desirable points, the notes are auto-called. Investors get their complete principal money and even get their coupons paid out. The redemption event takes place even before the expiry of the investment portfolio. Investors not only get their capital back but also interest earnings in the form of coupons. Therefore, this can be a time-saving proposition for investors to reinvest elsewhere or even utilize the money to meet their short-term or mid-term financial objectives.
What Are The Risks Associated With Structured Notes?
These are the following risk factors that are associated for investors who deal with structured notes. Helping you through a run-down into the same:
- Limited Liquidity
Most structured notes are not that liquid to dispose of as compared to regularly traded instruments like stocks, bonds, or even etfs. This is because the notes are tailor-made to suit independent investor’s requirements or preferences. Therefore, a note that is tailor-made for one may not suit the other. However, things seem to have changed with respect to this trend you have on notes.
You get ample opportunities to sell the notes back to the product issuers who can be wealth managers or investment-grade bankers. However, you may not get a complete redemption of your initial capital investment but a value lesser than that. You can also sell notes to the secondary market comprising of stock exchanges and shareholding companies at their Net Asset values or NAVs.
- Call Risks
When the credibility of the product issuing firms is at stake, then investors can lose on their initial capital investment or even their income-based payouts. That being said, this risk applies to all investment products that you choose and not structured products alone. Having a look at credit risk factors can be done during the issuance of a prospectus and the investors must take more than a sec look at them.
- Tax Implications
You may have concerns with tax implications as investor’s coupon payouts can be taxed as regular income instead of taxing at a lower-slab capital gains rates. However, this implication differs from a case-to-case scenario and cannot be presumed that the nomenclature is applicable to all types of structured products. However, you can consult a tax advisor to get a clearer picture of how tax implications work for structured products.
- Market Risks
The volatility of rising or falling assets through the equity markets can pose a potential threat that can impact the performance of underlying assets that the notes are linked to. You may not be able to realize the entire capital investment or have to go forward with missed coupon or regular-income payouts too.
However, structured product investment holders still stand at the benefit of receiving their capital and payouts if they choose principal-protected notes that promise capital and yields no matter how the underlying assets are performing in the market.
Plus, the notes have caps/ floors or barriers that provide downside protection against heavy forms of capital losses. This is at least to the buffer or spread cover your investment portfolio provides in falling market scenarios. Therefore structured product investors get better returns as against investment holders who may suffer more losses had they made direct investments in the stocks of blue chip companies. This is when the markets crash or show equity stocks or securities severely plummeting.
How Can Structured Notes Help Diversify Your Portfolios?
Structured notes are in fact the best form of dynamic investments today’s world can offer you. You can diversify your investment portfolio into fixed-income bonds and dynamic derivative components using structured notes.
Not only do you get notes that are 100 percent capital protected but you also get favorable returns from the underlying assets of the notes via coupons, interest earnings, and even dividend disbursement.
And, you get a flattened curve on the portfolio charts even when the other markets are not doing all that great. Investors have the opportunity to hedge notes to offset interest-rate fluctuations in favor of the asset portfolio.
To sell your note, getting in touch with your investment broker can help you with getting a fair price value of the note. You can also get in touch with an experienced investment adviser as to how portfolio diversification can be done with different pricing models that the note is tied to.
This way, you can easily gauge the level of downside protection you get and help you further analyze whether your principal at maturity is less than the price initially invested. Therefore, these are versatile financial instruments that give investors risk management options to achieve full return initial investment and attractive yields to meet specific investment objectives you have over the entire term of the asset portfolio.
As a crux, understanding structured notes with respect to their working mechanism is an important and solicit requirement while you also understand principal loss with specific investment options.
The Bottom Line
You find that structured notes bring to you innovative strategies you do not find in other forms of investments. These notes are dynamic and therefore even attract Gen Z millennials as compared to regularly traded bonds, equities, or even mutual funds.
After all, you get protection against your capital investment even while the market slumps while other investment options can completely wipe you off your investment capital. Traditional investors can go in for principal-protected notes that guarantee full principal whatever the current market conditions.
You can look for guidance from experienced financial managers on how different asset classes work. This investment advice can also help you decide if you get better returns due to market conditions that are favorable or if is it going the other way around.
You must understand market-linked risks before plunging into notes.
