A Structured Deposit is basically a Deposit with a Investment element. The risk for the Investor is usually the Deposit-taker, which is usually a Bank.
The main objective of a Structured Deposit is to improve the yield/return of the Deposit by investing in a 'structure' that will yield a Pay-off.
A 'pay-off' is the return after a specified outcome has occured. The amount(pay-off) due to the investor is dependant upon the performance of the underlying investment instrument such as FX currency movements, equity price, market indices, commodities, fixed income instruments or a combination of these.
So a Structured Deposit's returns are not fixed as compared to a Fixed or Term Deposit.
Additionally, some Structured Deposits could mean the investor may recieve nil returns but are principal guaranteed if held to maturity.
Structured Deposits are meant for Investors who are willing to hold until maturity. Breakage costs can be higher then normal deposits as there is usually another component (the 'structure') for the seller of the structure to unwind (reverse).
Tenors of Structured Deposits vary widely with some tenors as short as 2 weeks or could even stretch out to 10 years.
Another big difference between Structured Deposits and a normal Deposit is that Structured Deposits are not covered under most Deposit Insurance Schemes offered by the Central Banks.
Factors to consider before investing in a Structured Deposit:
- Liquidity - Are you likely to need the funds during the entire tenor of the investment?
- Returns - As returns are dependant on the performance of the underlying instruments, the investor must understand the relationship between the performance of the underlying instrument with the return on the structure. If the investor does not understand this, make sure the Relationship Manager at the Bank explains this fully and clearly.
- Risk - Structured Deposits are very flexible products that can be based on many underlying instruments. This carries different risks. Broadly speaking, Structured Deposits can be divided into Capital Protected and Non-Capital Protected. Clearly the higher the Risk, the higher the Return. This tenet should always ring loud and clear in an Investor's mind before investing in any Strucutured Deposit.
- Read the fine print - Terms and Conditions must be understood on how the Returns will be calculated and how the payment will be made at maturity. If the investor does not understand or is unclear of this, it is paramount to seek immediate clarification from the Relationship Manager. Some countries insist on 'cooling-off' periods from the time of the recommendation and the completion of the transaction. Ask your Relationship Manager.
Actually the Dual Currency Investment is a Structured Deposit!
What is a Structured Note?
A Structured Note is financial instrument with a Investment element. The risk for the Investor is the Issuer which may be a bank or some reputable financial institution. The Issuer may sometimes Not be the bank that sells the Structured Note and the risk is solely on the Issuer. Structured Notes are usually NOT principal protected. Structured Notes can also contain a 'callable' event that will mean that the Issuer has the right to terminate the structure Before maturity. Such early terminations will return 100% of the principal to the investor and are based on a formula explaining the exact event that needs to be triggered in order for the Issuer to exercise this right.
Structured Notes usually provide higher returns then Structured Deposits. So do make sure your Relationship Manager explains the Terms & Conditions clearly.
Many of the features between Structured Deposits and Structured Notes are similar except the 2 (two) main elements explained above. Investors are advised to consider the factors surrounding one's investment/risk profile, objectives and the other factors as recommended above before investing.
