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Understanding structured products

Structured products, often referred to as market-linked investments have emerged from the need to generate returns for investors which are just not possible from more conventional investments.

Structured products are typically ‘packaged’ investments with a limited lifespan and can be used in isolation to meet a specific investment goal or as part of a sensible diversification strategy. Most investments of this nature offer a predetermined minimum return but offer no guarantees.

Before you choose an investment, you should be aware of the possible rewards and be comfortable with the level of risk involved.

Rewards

Whilst there is no single uniform definition of a structured product, most are based upon two essential components. This first is a low-risk element, often known as a ‘principal guarantee’ which offers the assurance of a predetermined return if the investment is held to maturity. The term ‘guarantee’ in this sense is misleading since even the low-risk element could be in doubt if the issuer hit financial difficulty. The second element is a high-risk component, usually a sophisticated financial instrument such as an option, which will determine the size of the eventual return.

Risks

Structured products aim to provide investors with the potential for a positive return coupled with limiting the possibility of loss. However this is not guaranteed nor is there any guarantee of generating a positive return or beating inflation. Structured products often involve limited visibility for investors, in other words it is difficult to track the value of your investment, with the actual return sometimes unclear until eventual maturity. Additionally these investments lack liquidity and as such encashing them early will lead to penalty or loss of interest.

Important information

The value of investments and the income from them may fall as well as rise and cannot be guaranteed. Investors may not receive back the full amount originally invested. Past performance is not an indication of future performance.

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