Introduction
Structured notes are products that work slightly differently from how other investment plans work. These are notes that comprise debt and equity. While other investment options have standard guidelines and norms, the structured notes prove to be the only option wherein you can customize them according to your individual goals or requirements you have on mind.
Don’t you like having customized plans that align with your personalized or tailor-made financial goals or risk profiles that you alone are capable of handling? Well then, these are structured notes for you!
Let us further deep dive into more authentic reasons as to how structured notes and financial planning go hand in hand:
Highest Degree of Customization
Structured notes are designed to grow your money while providing you with capital protection. The notes comprise an optimal mix of debt and equity assets. The bond component of the note is issued in the name of the investor to typically protect the investment portfolio against capital loss or investment erosion. While the upside gains or the potential income the portfolio makes is dependent on the performance of the underlying assets these notes are linked with.
As an investor, you can utilize the notes to meet specific investing goals that can perfectly be tailormade to suit your risk tolerances, financial horizons, and goals you have in mind.
Here, a reputed investment banker or a wealth manager sits hand-in-hand to discuss what goals you possess as a client. Has it got to do with:
- Saving up enough funds to cater to your retirement expenses?
- Wealth accumulation towards funding your son’s or daughter’s education expenses?
- The overall growth of funds to help you lead a comfortable and prosperous style of living throughout your lives?
Well, you can opt for structured investing plans that align with each of the above. And, you can choose structured products that align with these goals with absolute ease and precision.
For instance, you can leverage a note so that it offers you enhanced returns from underlying assets while still providing you with a reasonable level of capital protection on the given portfolio during maturity.
Risk Management
No investment plan is free from risks of capital erosion, liquidity risks, market risks, or even credit risks wherein the performance or the credibility of the product issuing firm is at stake. And structured notes may also have the very same level of risks indeed.
However, the only crux here is unlike other investment plans like equity, bonds, or mutual funds, the notes provide a reasonable number of features that mitigate potential risk factors from impacting the investor’s wealth portfolio.
In other words, the product issuers can add market index values, buffers, caps, and floors to mitigate unprecedented losses investors would otherwise make had they invested the same amount of money via blue-chip stocks as direct investments.
The structured products therefore offer hard-core as well as soft-core protection against capital losses or investment degradation. Therefore, these are safer investment options as compared to the more risky and volatile equities or other investment products.
Risk Tolerance Vs. Investing Strategy
Financial plans can be adjusted or realigned using a series of structured notes that add great value to your investing portfolios in the long run. As an investor, you must understand, that these notes are not going to help you get income gains on a windfall platter nor are these notes aiming at get-rich-quicker schemes.
These notes are designed to ensure that every client’s risk tolerance vs the investment objectives connected with it, stay well aligned or go hand-in-hand. Therefore, structured notes can be great financial instruments that balance risks and returns, thereby providing you with investment products that limit losses even while markets are running through economic downturns.
At the same time, these notes can also help you gain financial growth and stability while offering you substantial growth potential. While the regularly traded bonds, fixed-income securities or even etfs may or may not offer this kind of a guarantee to investors.
Diversification Of Asset Classes
As has already been said, structured notes are products that combine an optimal mix of debt and equity. In a way, the structured note is a hybrid component product.
Therefore, when you invest in structured products, you get a wider range of exposure to markets. The investment markets can be primary, secondary, or even tertiary.
You also have the customization to choose underlying assets that need to be linked to the notes. The asset allocation comprises equities, commodities, a basket of securities, high-paying stocks, and currencies to name a few. This way, you include a diversified array of asset classes inside your investment portfolios.
Above all, it is well-understood that diversified income portfolios are way better than investing your idle funds just into single sources of investment like bonds or stocks alone.
Therefore, structured notes offer investment diversification of your portfolios and also get a better hold towards earning different sources of income levels thereby enhancing your potential growth concerning income-earning. And by doing so, you also reduce the volatility of your investments against losing out or getting potential losses on the same.
Higher Avenues Of Generating Regular Sources Of Income
Whether you want to engage in receiving regular forms of income such as interest earnings or coupon payouts, you can have them all with structured products. You can have your investment portfolios tailor-made concerning your payout structures too.
The market for structured notes is ever-increasing owing to the level of customization or innovation financial planners can adopt with every level of curation or designing of these products.
By having a series of underlying equities or derivative components inside your structured investment umbrella, you can look for regularized sources of interest earnings in the form of coupons or dividend disbursements.
You can also look for diversified income or growth notes wherein spikes in market values of underlying assets inside your linked-in portfolios translate into cash settlements as the money is directly wired into your respective bank accounts.
Therefore traditional investors such as retirees get long-standing income resources by investing in structured products as against bonds or fixed-income securities.
Tax Efficiency
You can customize products inside the notes so that you get the maximum number of tax benefits under your investment portfolios. You must consult tax advisors or financial planners to sit hand-in-hand with them and thereby discuss how tax implications may work on different forms of financial products.
This way, you get a clearer picture of how your income levels are slabbed for calculating taxes. There for some forms of income that can be treated or taxed as regular income while few other county jurisdictions can treat incomes earned through investments as capital gains income and the taxes are slabbed accordingly.
As an investor, you may also have to look through a whole fleet of tax considerations or in other words tax norms/ guidelines so that you optimize your funds’ post-tax returns. By implementing the tax norms on varied structured products, you have a fairer overview of how tax implications work on different types of structured notes the markets have in store for you. Therefore, you can implement tax-saving strategies on these notes and enhance the tax efficiency of your structured investment portfolios.
Get Hands-On With Market Conditions Vis-A-Vis Their Timing
Generally, structured products have pre-designed conditions like barriers or knock-out limits that have been set on their investment notes. These conditions work very well for investors if the market conditions or economic environments blend with the pre-designed conditions the product issuers have installed while they designed the notes.
On a general note, financial planners use a specific set of strategies to decide futuristic outcomes on these notes. They use derivative planners, market forecasts, and other economic tools to determine how assets or variables may perform in the market.
This way, suitable strategies are arrived at, that stand inclusive, within the notes. Above all, the investors must use their discretion too to gauge how the market movements currently are and how can they be expected to turn around in the future.
If the strategies get rightly aligned to the products after careful consideration of market forecasts or economic downturn events that may arise in the future, the notes can have protection clauses against these downturn scenarios and have the investors’ funds protected on the whole.
This Is A Versatile Form Of Investment
Structured notes come to you in various shapes and sizes. It suits investors who want to protect themselves against volatile interest rates. At the same time, an investor may want soft protection, hard protection, or a rock solid principal protection on his assets.
As the note is a hybrid security, the performance or value of the underlying assets determines the amount of payoff investors may receive while the products are redeemed. In a nutshell, the built-in protection these notes provide investors is not something you get with regularly traded bonds, equities, mutual funds, etc.
Therefore, the versatile notes have the potential to upscale your income-earning capacities providing a substantial degree of capital protection for your entire investment portfolio. That primarily explains why more and more investors are foraying into this mode of investing as this was an option that was only available to the ultra-wealthy retail and institutional investors two decades back.
The yields you get from structured notes are much higher as compared to traditional investment options like corporate bonds, fixed-income securities, or even mutual funds. For instance, investors receive the entire principal return with periodic coupon payments with autocallable notes. And, they need not hold the investment even up until maturity.
For the more dynamic investors, you can choose notes that deploy options strategies or leverage commodity futures to help them get that adrenaline rush while investing. The more risk tolerance you take under your belt, the better as investors receive higher income potential from the notes to more speculative levels.
Although investors may still suffer losses on specific investment plans if the market they are tied to performs adversely, this is something every investment plan may be subject to and not specific to notes alone. The downside protection investors get even under adverse bullish or bearish scenarios is not something regular investments offer on the whole.
For instance, the S&P 500 is tied with structured notes offers Swiss customers a consistent return and pays income notes too even under adverse market scenarios. Therefore, you have enough reasons that validate the versatile nature of how these notes perform or operate in the markets.
The Bottom Line
Although structured products cannot be easily liquidated owing to their higher degree of customization, investors can still sell the notes to product issuers or stock issuing companies in the secondary market.
As an investor, you must also look if your investment plans comply with regulatory or statutory norms concerning the investment portfolios that stand chosen.
Above all, you must also understand the product’s risk factors, the structure of the products, and other compliance requirements before you decide to sign in on the dotted lines.
What are your thoughts on this? Do let us know in the comments!
