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Types of Structures

There are two main structures. One offers a set return (in the form of either income or growth) but whether one gets back the original amount he/she invested will depend on how stock markets perform. The other has a minimum return, normally one’s initial investment, which one will get back but the growth will depend on how the underlying stock markets perform.

Evolution

The creation of the LIFFE [London International Financial Futures Exchange] resulted in financial products called derivatives being developed, the SIP’s were a natural extension of these products.

Principle of SIP's

Most of the money invested in a structured product is placed on the money markets - rather like an individual putting it on deposit at the bank - giving a fixed return over the ‘life’ of the product. This gives the individual the set return, be this income, growth or returning his capital. The rest of the money is used to buy an option, which will provide the variable return. Unlike most other share-based investments, structured products can provide a positive return even when stock markets fall.

An example - a three-year plan that became due for payment in April 2005 and was linked to the performance of the Stock Index XYZ 100 which paid 26% growth - as promised. It also returned 82% of the original amount invested giving an overall return of 8%. So investors made money despite the fact that the XYZ 100 fell 18% over the same period.

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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.