Saturday, May 13, 2006

Advice: Don't buy structured products

Summary of an article from Dr Money's website: www.askdrmoney.com

Structured investments, deposits and guaranteed funds are a popular investment, distributed mostly by banks.

Issuers came up with something like a customised gambling product. The product might take 20 well-known stocks, for example, and let people place bets on which three would appreciate the most over 5 years.

It is difficult to guess the outcome. The odds are structured in such a way to give you a big payout if you win. And it provides you a "guaranteed" minimum return. It looks like a good investment, with no risks and good upside potential.

But it has many negative features.

1. Distributors are mostly banks. Their standard fee is 3 per cent of the amount invested. This charge is deducted from the net asset value of your investment. If you sell your investment immediately after purchase, you would receive back 97 per cent of your investment. Ultimately, the sales commission reduces your yield.

2. Issuers are the architects who design the structured product. They invest your money, after the distributor sends it to them. It is NOT possible to know how much the issuer takes from returns. You can ask the issuer or the distributor but they won’t tell you. It could be, say a fixed 2 per cent per year when total returns are between 2 and 6 per cent.

3. The structured product is linked to return from the underlying investments. If the return is high, the issuers have found a way to give you only a part of the gain, and to keep the excess return for themselves. They cap your return.

You can never know if you are getting a fair return for your money. It depends on how the product is designed.

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