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Structured investment products blend a unique combination of security and risk in an investment portfolio. They have some typical characteristics and are usually prevalent in the well developed financial markets. Here we discuss the fundamentals of SIP’s.

Definition

There are many definitions as to what constitutes this type of product. In the simplest form of the meaning, a structured investment is any investment that packages two products into one offering and derives its value based on the return or partial return of one or both of the products.

It is a fixed-term investment where, before one invests, one can work out the minimum and maximum return in the form of his/her original investment and any income or growth it produces. The return is usually based on the performance of stock market indices or individual shares.

The Nomenclature

Why the product is called structured - this is because the investment structure is set when one makes the investment to give certain returns under different circumstances. These are explained in each product so there is a clear investment structure. As everything is set beforehand, one can work out the overall return in any given situation. These products pay a fixed amount of income (at regular intervals) or growth on one’s investment when it becomes due for payment. However there is a risk of losing some of the original amount invested, if the index or the basket of shares to which the plan is linked falls beneath a certain safety level and does not make a sufficient recovery. SIP’s used to be issued as life assurance bonds, but have been replaced with closed ended investment companies, typically based offshore (usually in Dublin), or as bonds.

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* Contributed by -
Vipin Arora,
B.Tech. (Polymers), H.B.T.I. Kanpur,
MBA (Batch 2004-06),
Dept. of Management Studies, I.I.T. Roorkee.