'A structured product is a product in which you know the end result before you buy it'

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: 3 years the Nifty remains positive, the bank or company which sold you the structured product will give you a flat 57% return on investment.

However, if it goes negative, for every 1% drop, the bank/company would give you 2% less return than what you were getting. There are also other products like vanilla participation and knocked-off structured products, which are again capital guaranteeing in nature and of similar complexity as the ones I have cited.

How does capital guarantee work in structured products and how do companies selling such products earn from the part of the funds used to protect the initial capital?

Capital guarantee products manage to safeguard an investor’s wealth using simple investing. If one invests Rs 100 in a structured product, which is options based, then the bank or company selling the company will put Rs 20 in options and Rs 80 in fixed income bonds, which will mature to be Rs 100 by the end of the product tenure of say 3 years.

This way the capital of the investor is always protected and yet he has a chance to earn a return on investment. Non-capital guaranteeing products have higher risks as they do not follow this method. However, their returns and losses, if any, are also higher.

As far as the company or bank issuing structured products are concerned, they can make money from their Rs 80 invested in fixed income bonds too.

This is done as they get zero coupon bonds, while every bond is as such issued on a premium of 2-2.5%. Hence, while issuing these bonds they make their fee.

What is essential for an investor to realise if he/she wants to invest in structured products? What are the risks to be aware of?

The most important criteria for anyone who is purchasing a structured product is that they need to have a view on the markets. If you are bullish on the markets then you will buy a product that follows that line of thought and you might go in for a reverse convertible product.

Other important factors that investors should be very particular about is, understanding the structure of the product, taking note of the rating and rating agency of the product and checking if the product is secured or unsecured.