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What are structured investments and how do they work?

One of our key missions at Affinity Capital is to educate and empower investors to make the best decisions for their risk-return needs. People can only do this when they are armed with the right information about the most suitable options available to them.

Risk-averse investors may opt for full capital protection on their initial outlay.

Structured investments have received a significant amount of bad press over recent years, and this coverage is still preventing many individuals from adding these financial products to their portfolios.

Some of the negativity towards structures is partly due to their perceived complexity. However, we don't believe they are any more difficult to understand than many other types of investment.

Still unsure of how structured investments work? Here is an introduction to the traditional features and benefits of these products.

Understanding the basics

Structured products are fixed-term investments that usually combine a bond-like element with a financial option. The bond offers capital protection, while the option provides the returns based on the performance of an underlying asset or collection of assets.

Put simply, structures give you the opportunity to protect your initial investment and benefit from predefined returns depending on how the markets perform. Crucially, these investments often pay out whether markets have moved up, down or sideways.

Let's look at a capital-protected structure as an example. Approximately three-quarters of your investment would go towards a bond that pays out 100 per cent of your initial outlay when it matures.

The remaining 25 per cent, minus fees and costs, would be invested in the chosen market, such as the FTSE 100. Your returns will depend on the specific stipulations of the product, but if the underlying asset meets the necessary parameters you will receive a predefined payout, as in the below image.

Structured investments and returns. A 'capital protection' structured product where the maturity of the bond returns the initial investment.

The word 'predefined' is important. This means you know from the outset what payouts will occur under each scenario, ensuring you are fully prepared for every eventuality.

Choosing the right structured investment

Structures can also be tailored to fit your specific needs. Risk-averse investors may opt for full capital protection on their initial outlay, but those looking to maximise returns can sacrifice some or all of this protection.

With predefined risks and returns, a choice of capital protection levels and the ability to finely tune each investment to your requirements, we're not sure where structures have picked up their reputation for complexity!

Nevertheless, not all structures are created equal. As with any other type of investment, there are unsuitable products out there, which is why it's vital to seek advice on the best approach to take when adding them to your portfolio.

Let's recap some of the benefits (and mention a few new ones that haven't been covered) of investing in the right structured investments:

  • Capital protection for risk-averse investors
  • Effective portfolio diversification
  • Predefined outlay and returns
  • Returns across a number of market conditions
  • Set maturity dates may help with tax planning
  • Can provide access to new markets
  • Secondary markets are available

Learning more about structures

We've outlined some of the basics about structures, but we feel the more informed investors are, the more likely they will be to achieve their objectives.

That's why we believe in educating our clients and ensuring they are central to the decision-making process when searching for the right structured investments for their portfolios.

If you'd like additional information on this type of investment, please visit our videos or FAQs pages to learn more. You can also keep up to date the latest news in the wider investment world by regularly checking our blog.

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