Introduction
In today’s world, quite a lot of innovation is happening in the way the finances and investment world work. Traditional bonds and fixed-income securities were ruling the investment world two decades back. However, now, the retail segments are being introduced to more sensible methods of investing.
That being said, the more novel styles of investing options, get you customization and help you avail tailormade options to achieve your long-term, medium-term, and short-term investment plans. These are structured notes that are being talked about here.
Let us get you started on what structured notes are and how the concept behind structured notes minimum investment typically works!
Structured notes- definition and concepts explained
Structured notes are notes that comprise debt and equity. The notes are designed to protect investor’s capital and at the same time lend better rates of return as against traditional bonds or fixed-income securities. This is because the bond component protects the investor’s principal investment while the equity component comprises equity-related assets.
The asset allocation comprises equity shares, securities, a basket of stocks, or high-paying currencies. This part of the notes develops the derivative portion of structured notes.
While the bond protects the capital or principal investment of investors, the notes have underlying assets that are linked to them as such. Therefore, the returns on investment are linked to the performance of underlying assets the notes are linked with.
While the capital or principal amount is a fixed component, the earnings the notes make can be variable or dynamic. The product issuer of the notes keeps gauging the performance of assets from time and time.
The notes are structured as they have sophisticated tools to protect the investment portfolios as compared to traditional bonds or equities. With a series of financial instruments the notes are embedded with, the investing portfolio gets to have a steady rate of return while protecting the investor’s capital or principal amount.
In a crux, to invest in structured notes, you must have an understanding of how the mechanism works here.
What is structured notes minimum investment?
The structured notes‘ minimum investment starts at one million US dollars with no caps on the upper limit. It is the private investment bankers or wealth managers who design the notes. Therefore, the minimum investment tag can differ in a case-to-case scenario.
The dynamic nature of the notes and the flexibility with which investors can mitigate their losses while enhancing their gains is what makes the industry a trillion-dollar industry.
Investors can also get regular payments from structured bonds on a quarterly or a half-yearly basis. And, most of the products come to you with a principal protection and that explains why structured products are priced this way.
This way, you find that structured notes can be income notes or growth notes. This is because structured notes provide quarterly or term coupons as a source of income. This provides a downside protection cover to investors.
Therefore, you have retail and institutional investors who don’t mind investing their funds into structured notes.
Learn enticing reasons as to why notes are priced this way
Why are structured notes priced this way? Let us get you through a run-down into reasons that follow:
1. Customized wealth portfolio
As you all know, structured notes are hybrid investments that comprise a mix of debt components that are linked to the value of underlying assets. The notes can get your fixed income returns through coupon or mortgage bonds.
At the same time, you can also have your returns linked to the performance of the underlying assets. The asset allocation can be in the form of shares, stocks, bonds, credit notes, currencies, and other trading instruments.
The investors here get an opportunity to build their customized investment portfolios based on their risk-handling tolerance. It is the customization that attracts investors in favor of structured notes.
2. Issued by reputed banks and financial organizations
Structured notes are issued by sophisticated and well-to-do brands in the finance world. These are banks and institutional organizations that are talking about.
These notes are usually issued by Goldman Sachs, Morgan Stanley, JP Morgan, Citi, Bank of America, Vanguard, and Merrill Lynch, to name a few.
Most investors are offered downside protection towards rising or falling assets these notes are linked to.
3. Transparency in the investment selection process
The investors and the product issuers sit hand-in-hand to discuss your risk tolerance and your ability to transact or trade with these structured notes.
These notes are designed to protect investor’s capital and yet provide potential returns on the investing portfolio. The investors decide the underlying assets that get linked to the notes while they can also decide the tenor of the investment plan to take care of their immediate or long-term financial needs in a seamless manner.
In a nutshell, structured products offer a great level of transparency to investors as well as the product issuers on the whole.
4. Short-term investment plans
You can choose structured notes that have a minimum investment period as well. For instance, auto-callable notes get redeemed once assets reach a certain level concerning their initial strike prices and final sale points.
The product issuers gauge the performance of these notes during observation dates and once the preset conditions on the notes get fulfilled, the notes stand auto-called. In other words, they stand redeemed. This can happen before the maturity term of the investment portfolio.
Therefore, you can customize notes with shorter tenor periods to fulfill your immediate financial objectives.
5. Your capital money always stays at work
Most investment bankers appointed dedicated investment and wealth managers who would monitor your growth or income notes at closer quarters. Therefore, even if the prices of notes fall or the performance of underlying assets declines, your income base would be diverted to more profitable avenues of income. Therefore, your capital money stays awake even while you sleep. And, it is at work 24/7.
6. Versatility
Structured notes have a versatile number of benefits that investors find highly appealing. These notes provide vantage benefits over fixed interest rate bonds or index value debt security options that lose value over time.
The affiliate notes provide promising future results as the investors may never know how their assets would perform over the entire tenor of the asset.
The investors therefore need not worry about their past performances on failed decisions of investing while this versatile option can help your portfolio gather steady growth even while the market conditions are adverse.
What are the risk factors while you deal with structured notes?
These are the risk factors you have while you deal with structured notes. Helping you with the pointers connected with the same:
1. Credit risk
Structured notes may be exposed to credit risk if the product issuing firm signs up for bankruptcy. The investors may lose a partial or the entire portion of their capital investment if the issuing company defaults.
Take the example of Lehman Brothers. While the biggie investment banker in the US had signed up for bankruptcy in the year 2008, most of the structured notes issued by the said firm became valueless.
2. Market risk
The performance of underlying assets depends on the highly volatile equity market. The assets may rise or fall through bear or bull markets the stock exchange firms are constantly exposed to. When the assets do not perform well, the investors may not get lucrative returns on their notes.
3. Liquidity risks
The structured notes may not be that liquid owing to their complex structures. The investors may have to hold the notes until they mature. While investors have dire financial needs, they can sell the notes to the product issuers or secondary markets comprising stock exchanges, financial institutions, or securities holding corporations. However, the possibility of getting the complete redemption of capital or principal investment is not guaranteed here. The investors may lose a part of their principal investment when they want to liquidate their notes before the term period of the notes.
4. Tax implications
As structured notes combine debt and equity, the tax implications may work differently from how things work concerning regularly traded instruments like bonds, equities, and mutual funds. The income earned via notes through coupon payments or interest earnings may be treated as regular sources of income and be taxed accordingly. However, lower tax slabs apply for investment products wherein the income earned from those products is treated under capital gains income and lower tax slabs apply for capital gains income. Therefore, as an investor, you must get proper guidance from a tax consultant or a tax advisor as to how tax implications work concerning different types of structured notes comprising varied asset classes.
5. Complex fee structures
It is a commonly discussed myth that structured notes charge their investors a lot of fees as compared to regularly traded instruments like fixed bonds, CDs, and mutual funds. You may have processing fees, transactional fees, fund redemption fees, and other types of fee structures that apply here. However, this norm is not true with all types of structured products and can vary significantly from one structured product to another. That being said, it is your responsibility to check with your product issuing firm as to how fee structures apply to the notes you have chosen to buy from them. This way, you would have better clarity over how fee structures work before you sign up with them.
The Bottom Line
Structured notes are priced this way as they provide various benefits that are spread over for the investors to play around with. Some investors may like to diversify their investment portfolios by including high-paying stocks or equity shares inside their portfolios.
At the same time, these notes also suit the primary prerequisites of traditional investors who may want to protect their capital investment money.
You must learn the varied risk factors before signing up for any kind of investment plan. Learning the risk factors before signing in on the dotted lines can help you avoid making incorrect moves.
