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Humanising Finance
November 2018
5 ways to get into the habit of saving
   
 

3 Things to Know About Structured Products

Structured financial products earned a bad name during the 2008 Global Financial Crisis, during which Lehman Brothers collapsed and declared bankruptcy. In Singapore, structured products linked to the credit-worthiness of Lehman Brothers, or some knew it as "Jubilee Notes" sold by some retail banks, eventually became worthless and resulted in many investors losing their investments. For a long period thereafter, many investors have shunned structured products, deeming it as an undesirable investment product.

Humanising Finance revisits what structured products are, and the key things to look out for when investing in them.
 
 
1. Understand the features
 
Structured products have unique financial derivatives embedded in each product pay-off which allows for various pay-off conditions and features. For instance, a particular product may have a "knock-in" level embedded which provides for any downside risk buffer up to a certain level, say 20% of the initial price. Understanding in what circumstances will the "knock-in" be triggered will allow an investor to gauge whether the product suits one's risk appetite.

For instance, a shallow downside risk buffer of say 5% may give an investor a better investment yield, but ultimately exposes the investors to higher risk.

Understanding other features such as whether the product is principal protected, how the yields are derived will allow an investor to better understand the products.
 
2. Be familiar with the underlying assets
With reference to the abovementioned "Jubilee Notes", the underlying asset is a basket of bonds from various financial institutions and corporations. Essentially, these notes are linked to the credit-worthiness of each of the bonds in the basket. If a particular firm in the basket collapses, the pay-off of the note is adversely affected. Structured products may be linked to any asset classes, such as equities, foreign exchange, interest rates and commodities. Savvy investors should make it a point to understand the underlying asset class and stay well-informed.
 
3. Know the issuer of the structured products
 
The issuer of a structured product is essentially the financial institution which underwrites and takes the investors' investments to purchase its own bonds (usually 80% of the investment) and put the remainder in derivatives, giving investors a certain level of potential yield or capital returns for their investments in exchange.

Investments in structured products are not covered by the Singapore Deposit Insurance Corporation (SDIC). An investor may lose one's investment in the event of issuer default, therefore it is important to understand the risk-return dynamic. The return from a structured product investment is related to the profile of the issuer and its credit-worthiness. A lower-rated financial institution may find it difficult to source for investors, hence it is willing to pay a higher coupon rate or provide structured products with attractive rates in order to garner investment interest. For example, issuers that are AAA-rated by Moody's will typically offer yield or pay-off lower than a product issued by another BBB-rated institution.

Ultimately, a structured product, or any other financial investments, is like a mechanical tool - reading the user manual, knowing what the tool does and how it works will make the mechanic's work easier. Failing to do so may otherwise result in injuries.
 
   
 
Interested in finding out more about Structured Products and what we can offer? Locate your nearest Maybank branch to get in touch with our team of professional wealth managers.
 
Disclaimer: This message is for general knowledge or information only. It is not an offer or invitation to buy or sell securities, futures or other products or services. Our products or services vary in different jurisdictions, subject to their respective terms and conditions and the licences our affiliates and us hold. This message is not an advice or recommendation for any financial planning, investment, legal, tax or other purposes and, accordingly, no responsibility or liability is assumed by us or our affiliates, whether directly or indirectly, from any person taking or not taking action.
 
Always wanted to find out more about a finance-related issue? Email us at: corporateaffairs@maybank.com.sg
 
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