Introduction
Equity-Linked Notes or ELNs are structured notes that combine debt instruments with equity.
The notes have underlying equities comprising equity, well-paying stocks, and a basket of premium securities. High-net-worth individuals (HNWs) also link currencies to increase their returns on investment.
While the debt instruments provide an overall degree of cap-wallet protection, it is the performance of underlying equity-based assets that determine the returns you make on your investment portfolio.
On this parlance, let us unveil the blog topic What Are Features, Benefits And Risks of ELNs. Helping you get started further:
What are the Features of ELNs?
These are the main characteristics of ELNs that differentiate these notes from the other genres of structured products.
Let us have a run-down of pointers that are associated with the same:
Debt Instrument with equity exposure
If you have a look at it, the ELNs are notes that usually come to you with fixed tenor or maturity periods as designated by the product issuers.
The product issuers can be private wealth management firms, high-grade investment or financial institutions, and banking entities to name a few.
However, the returns on investment for these notes are determined by the performance of underlying equity or index values of linked-in assets the notes are tied to.
Complete or Partial Principal Protection
Most of the ELNs come to you with full or partial capital protection, as a matter of fact.
When the ELNs are capital-protected, you might receive 100 percent of your capital wallet regardless of the underlying assets the notes are linked with.
On the contrary, if the ELNs are not fully capital-protected, then the investors might lose a partial value of their cap investment if the underlying assets perform badly at the markets.
Fixed or Variable payment of coupons
The product issuer may credit fixed coupon payouts on ELNs if the terms and conditions of the notes state the same. This is irrespective of how the assets perform at the marketplace.
On the contrary, the coupons might be variable payouts if the payouts are linked to the performance of underlying equity these notes are tied to.
In a nutshell, ELNs provide fixed coupons similar to traditional bonds or provide you with variable coupons similar to equity.
Highly customized in nature
ELNs are highly customized notes that can be curated to meet every investor’s independent financial obligations to start with.
For instance, you can design ELNs to protect your capital wallet. Or, these notes can be curated to help you gain better exposure inside the equity market.
Or, you can use these notes to leverage your returns on investment to the upside potential of the underlying equity.
What are the Benefits of Equity Notes?
Diversification
With ELNs, you can diversify your investment portfolio on an exponential scale indeed. This is because you can get income payouts in the form of:
- Corporate dividends
- Fixed coupons and
- Variable payouts based on performance-linked returns
This way, you can meet your potential financial requirements that are immediate or across the near future.
Get an equity exposure without making direct investments
You get wonderful exposure to equity without having the need to make direct investments on stocks or shares.
This way, investors get a wholesome exposure on the equity market without making direct investments with stocks or having to need to experience the volatile conditions the markets provide to direct equity holders on the whole.
In a nutshell, when you hold ELNs, you get equity exposure while still holding debt instruments and that makes the process even more exciting.
Enhanced rates of return
You get a more enhanced potential of earning beter returns on your investment as compared to what you earn via traditional bonds or fixed-income securities.
This is because the returns on investment are linked to the underlying assets of equity that can perform highly well inside the markets.
And, you can capitalize on the profits these assets make if these equities fare really well inside the markets.
Highly customizable
The ELNs can be customized to suit every investor’s potential. You can tailor these notes to suit your specific investment goals such as:
- capping returns
- adding a layer of leveraging to your current investment portfolios and
- choosing a specific equity index or sector
What are the risks of ELNs?
Here are the main risks you have that are primarily associated with ELNs.
Let us have you covered, with a run-down of pointers that are connected with the same:
No principal protection for investors
ELNs are notes that are primarily linked with equity-based assets or indexes. Therefore, the investors can always face the risk of losing a partial value of their capital investment if the linked-in assets do not perform as expected.
Market risks
The ELNs have equity-based assets whose prices can rise or drop depending on whether the equity markets indicate bearish trends or if they experience bullish trends.
The rising markets indicate bullish trends while the falling markets indicate bearish trends for equities like shares, stocks, or a basket of high-paying securities, to name a few.
As ELNs are primarily linked with equity-assets, the notes are also subject to volatile market conditions that can impact the returns on investment they can earn from their investment portfolios, on the whole.
Credit risk
Credit risk primarily refers to the risk when the product issuers declare themselves as bankrupt or issue a statement of insolvency and then the notes can be tendered value less or penniless.
For instance, in the year 2008, two major financial biggies namely the Lehman Brothers and Merrill Lynch signed up for their insolvency and most of their structured notes were rendered value less.
This was the year the US economy tendered a global recession scenario for the entire world too.
Credit risk therefore is a major risk an investor can face wherein he loses his principal wallet as well as the interest earnings.
Liquidity Risk
The ELNs are complex to learn or understand for a newbie or an amateur investor.
Therefore, it also does it make things very simple for the retail investors to get these notes traded easily as is done for equities inside secondary markets.
The investors of ELNs therefore may have to wait until their maturity periods to have the notes redeemed for capital and interest.
The Bottom Line
What are your thoughts on this? Do mention it in the comments below!
Frequently Asked Questions or FAQs
What is an ELN?
Answer: An ELN is a note that has a derivative linked to equity-indexed assets. The equity-linked notes provide fixed and variable coupons depending on the performance of assets the notes are tied to. The elns offer flexible tenor options appealing to risk-averse investors. The equity-linked notes provide a way to diversify your income earning potential and this is a type of structured note that must be held until maturity.
Who provides you with investment advice pertaining to ELNs?
Answer: You can approach Quadra Wealth Investment Advisor lic or other private management firms that allow investors to customize their investment options and make stable portfolios for decades to come. The equity-linked notes are usually debt instruments with a good exposure to equity. The notes are designed to provide full principal protection on your initial investment while returns are linked to the performance of linked-in assets. However, the investors might lose a portion of their cap wallet if the assets perform poorly in the market.
