Reasons to avoid structured products

If you invest in a large, well diversified, low cost equity fund, you are able to earn an average return of 6% to 8% per annum, over 10 years or longer. There is risk, but this is already reflected in the average return. The risk is also reduced through diversification.

Some investors do not wish to take any risk. They like to have a safe, guaranteed return. In this case, they should just invest in government bonds, which earns about 3% per annum.

But, they like to earn more, without accepting the risk. To meet this unrealistic desire, the financial institutions came out with structured products. It involves investing in a pool of investments, and shifting the risk and return among various classes of investors.

The total return to all the investors is reduced by the cost of designing, marketing and managing the products. Collectively, the participants are worse off, after paying the high fees to the issuers, lawyers and marketeers.

Guess who gets the best deal? It must be the intelligent investors and the issuer of the structured products.

Guess who gets the worst deal? It is the unsavvy investors.

Lesson: If you do not want risk, invest in government bonds. If you want a better return, invest in a large, well diversified, low cost equity fund for 10 years or longer. Do not invest in structured products.