Why structured products are risky

I wish to give a hypothetical example of a structured product, to show why the product can be risky to consumers. Some structured products in the market work in this way.

An investor who wish to have a safe guaranteed return for 5 years can expect about 3% per annum, by investing in a government bond.

A structured product can be designed to give a return of, say 5% per annum. To give the enhanced return of 2% per annum, the product has to give a potential loss of slightly more than 10% per annum (ie 2% p.a. compounded for 5 years) on maturity.

To hide this potential loss on maturity, the product will pay back 100% on athe principal on maturity under certain events, but will define some events (with a 10% or higher chance of happening) where the investor lose the entire principal.

The investors may not realise that they are taking a real risky bet.

The actual risk of losing the entire principal could be as high as 20% in this example. The arranger has to package this higher risk, as they wish to have an additional margin to pay the distributor (ie the bank that sells the structured product) and to keep a profit for the arranger (who designs the structured product). The total charges can be as high as 10% of your principal.

If you wish to have a safe return, are you really prepared to take a 20% chance of losing your entire principal?

The advertisement warns investors of the risk of losing the entire capital on the occurrence of certain events. You should take this warning seriously. Do not trust the words of the marketeer that the risk is "very small". It can happen and may be quite high, ie 20% or higher.