Structured Investment Products can be defined as a kind of investment particularly meant to serve the financial needs of an investor by virtue of tailoring the product mix to match the risk tolerance levels of the investor.

SIPs are usually designed by changing the degree of exposure to uncertain investments and mostly comprise the use of an assortment of derivatives. A structured investment product is subject to variation as per the tolerable risk levels of the investor. Structured investment products characteristically entail a variety of coverage to fixed income markets and different derivatives. Those investors with a conventional approach have greater exposure to the fixed income markets, while investors who are risk reluctant will have a greater exposure to equities and derivatives.

Understanding Structured Investment Products

Financial modernization and the growth of investor class has changed the retail investment world that once was a serene, to a certain extent satisfying place where a petite, eminent genre of trustees and asset managers formulated practical portfolios for their well off clients within a scarcely definite range of high-quality debt and equity instruments. One advancement that has achieved footing as an addendum to retail and institutional portfolios is the genre of investments largely known as structured products. Let us first try to understand what structured investment products are. Structured products are developed to aid highly customized risk-return intents. This goal is met by taking a traditional security, such as a conservative investment-grade bond, and substituting the customary payment traits (e.g. periodic coupons and final principal) with non-conventional pay-offs resulting not from the issuer’s own cash flow, but from the accomplishment of one or more fundamental assets.

The pay-offs from these performance upshots are reliant in a way that if the underlying assets return “x”, then the structured products pay out “y”. This suggest that structured products strongly relate to customary models of option pricing, even if they might include other derivative types such as swaps, forwards and futures, in addition to embedded features such as leveraged upside participation or downside buffers. Structured products initially gained fame in Europe and have acquired currency in the U.S., where they are recurrently presented as SEC-registered products, which means they are obtainable to retail investors in the same manner as stocks, bonds, exchange-traded-funds (ETFs) and mutual funds are. Their capability to provide personalized exposure, inclusive of otherwise difficult to reach asset classes and subclasses, makes structured products beneficial as an accompaniment to these other conventional components of diversified portfolio.

One of the key attractions associated with structured investment products for retail investors is the aptitude to customize various assumptions into one instrument. For instance a rainbow note is one that grants exposure to more than one underlying assets. Yet another admired feature is a lookback. In case of a lookback instrument, the worth of the underlying asset is determined on the basis of average of values taken over the note’s duration, say monthly or quarterly and not on its final value at expiration. It is also known as Asian option. Combining these types of features in structured investment products offers attractive diversification properties.