During a boom, wealth management firms try various means to attract the wealth of high networth individuals (HNIs). One such way is – structured products. And, there are variants for all kinds of investors. For ones with high exposure to equity, there are hedging products. For conservative investors, there are capital protection plans.
However, these products can hurt quite badly. “Once you start peeling off the layers, you realise they have caveats and could be very risky,” says Gaurav Mashruwala, a certified financial planner.
In 2007, a large number of HNIs lost money because of wrong calls by fund managers. Recently, the head of a wealth management firm had to resign, when a structured scheme reportedly made losses of over Rs 40 crore. The scheme was pitched as safe investment that would give 1-1.5 per cent returns each month using futures and option. When the market rallied unexpectedly in September, the calls of fund manager backfired.
Market regulator, the Securities and Exchange Board of India (Sebi), has put a spanner on capital protection schemes by asking rating agencies to stop evaluating these. The existing structured products usually have the tenure of 15-40 months, and offer customers capital protection plus an upside in underlying asset class. At present, gold-oriented structures are a hit among investors, as the commodity has given annual returns of over 20 per cent consistently for the past three years. Many wealth management firms believe the upward trend will continue due to uncertainties in the US economy.
The second popular product is nifty-linked debentures, which promise a particular return if the index gains. For example, if Nifty gains 40 per cent in three years, the investor will get 22 per cent returns in that period. However, if markets correct, there is no downside.
Capital protection
The issuer invests the majority of the corpus in debentures. For example, say you invested Rs 5 lakh in a three-year product. The distributor will put Rs 3.95 lakh in debentures and issue an interest-bearing coupon of 8.5 per cent. This money is expected to protect the principal, as it will grow to Rs 5 lakh in the three-year period. The remaining Rs 1.05 lakh is used to take a call in the futures and options market.
Risk
“There are times when the company issuing debentures may not even have the assets or enough business to justify the borrowing,” says Sandip Raichura, business head, wealth management, Pinc Money.
Returns and complexity
These products are stock- specific, have hybrid structures and even invest in the offshore markets. They are usually sold through portfolio management services with a minimum ticket size of Rs 10 lakh.
Even the way returns are supposed to be delivered is different – 100 per cent, 110 per cent, or even 175 per cent of the Nifty movement. There are caveats in the form of dates of observations (dates they will consider Nifty movement) and barriers (the index crossing a specified limit). “In most cases, the investors make returns on par with debt product,” adds Mashruwala.
There is a distribution cost, known as placement fee, of three per cent. Other charges are built into the product. “You don’t realise them unless you unbundle the product part-by-part,” says Raichura.
The problem is the returns have not been comparable to the movement in the underlying asset, according to financial planners. It is very difficult to assess the real return possibility.
Liquidity is another issue. Usually, these products are listed on stock exchanges within 30 days of closing. While the listing is supposed to provide an exit route to the investors, there is no secondary market for them. “In my experience, I have not seen a single trade on structured products on stock exchange,” says Sriram Venkatasubramanian, head – wealth management, FCH Centrum Wealth Managers. Consequently, you may have to stick with the product for the entire tenure.
