What are Structured Products: When & How to Invest in Them?

Introduction

Structured Products, or MLDs, have been a hot topic of this decade. With a growing market of ₹6000-₹7000 crore annually, this industry has uplifted the hopes of the investors.

But, ever wondered, if MFs and PMS exist, why are "Structured Products" popular? And can anyone invest in them, or just available to a limited people?

If you're new to this product, this guide will simplify each component for you – from the meaning of SPs, how they work, who can invest, different types of structured products available, and much more.

Stay tuned to explore everything you need to know about "Structured Products" in this blog.

What Are Structured Products (SPs)?

Structured Products are custom-made packets that combine two asset classes. These are usually NCDs (non-convertible debentures) that combine a debt instrument with a derivative product. For example, an MLD consists of a debenture whose performance depends on the Equity Index or 10-year Government Securities.

But how does this derivative (or underlying asset) help?

While debt can bring the principal protection factor, the derivative brings the potential of the stock market to the portfolio. Also, the returns depend on how the NIFTY index performs. So, if the NIFTY rises, you earn more. Likewise, if it falls, your capital is still protected.

How Do Structured Products Work?

Structured Products usually combine two components — an NCD (Non-Convertible Debenture) and a conditional coupon. Simply put, one part ensures fixed-income features like debt, while the other is linked to a derivative (for example, an index like NIFTY or Sensex) that determines your potential returns.

However, these products come with specific conditions for earning returns.

For example, let's consider you invest in a Market-Linked Debenture (MLD) tied to the NIFTY index.

• If NIFTY stays flat, you'll get back your principal, but no extra return.
• If NIFTY rises by 10%, you'll earn a certain percentage as profit, based on predefined terms.
• If NIFTY falls, your returns may reduce or become zero, depending on the product structure.

But the capital protection isn't just an automatic feature in all products. It's only available if the issuer explicitly mentions it in the product's terms. For non-capital-protected structured products, your invested amount is also at risk.

Types of Structured Products

Based on the protection provided, there are a few types of structured products available in the market.

Principal Protected SPs - Here, the invested capital gets protected up to a certain level.

Non-Principal Protected (Non-PP) SPs - There is no principal protection provided, which could cause decay.

Partial Principal Protected SPs - The issuer may protect a part of the invested capital, compared to nil protection.

However, one must also consider that the underlying asset (derivative) may vary in some cases. For instance, you may find structured products linked to T-bills, G-secs (government securities), repo rate, BSE index, etc.

Who Should Invest in Structured Products and When?

For adding SPs to your portfolio, the first requirement is to have ₹1 lakh as a minimum corpus. But, even with this, one must understand that structured products are medium to long-term investment products (at least 3 to 5 years).

Due to its market linkage, they take time to realize their potential. Hence, short-term investors may find them unsuitable. Also, those expecting returns more than fixed income but less risk than pure equity can find SPs suitable.

Also, these products have very low liquidity levels. So, if you intend to sell off soon, you may not receive what you could have.

When Should One Invest In Structured Products?

Investing in structured products or MLDs should come with product awareness. It is only when you know how the market works and the associated risks that this instrument can serve better.

But, before investing, do consider your risk appetite and investment horizon.

Benefits and Limitations of Structured Products

If you intend to invest in structured products, do check the listed pros and cons. It will help you make better decisions:

Benefits	Risks
Combines debt stability with market-linked growth.	Here, returns depend on market performance.
Helps diversify your investment portfolio.	Limited liquidity until maturity.
Offers equity exposure with lower downside risk.	SPs can be complex to understand.
Can link to multiple asset classes.	Exposed to issuer (counterparty) risk.

How to Invest in Structured Products?

Unlike mutual funds, many structured products are not readily available on exchanges. Due to limited liquidity, you can only invest in structured products via a SEBI-registered broker or MLD issuer.

Let us see how you can invest in them step by step:

• Consult a SEBI-registered advisor or broker - Since structured products can be complex for beginners, it's preferable to go through a professional who understands their design, taxation, and risk profile. They may guide you on the investment part.
• Check your eligibility and ticket size - These products have a minimum ticket amount of ₹1 lakh, making it accessible to a selected group of investors.
• Understand the product structure - Each structured product varies in its structure. So, as an investor, review details like the underlying index, coupon conditions, capital protection status, and tenure before investing.
• Evaluate issuer credibility - Always check the credit rating of the issuing company or NBFC to reduce counterparty risk. One can find it in the product disclosure document.
• Review taxation and exit options - Market-Linked Debentures (MLDs) are usually taxed as capital gains, not interest income. However, exiting before maturity or the lock-in period may reduce your returns or liquidity.

Taxation & Exit Implications

Irrespective of the holding period, Structured Products and MLDs are taxed at individual slab rates as Short-term capital gains (STCG).

So, even if you held SPs for more than 1 year, you will still attract STCG, which was earlier 10% (before the 2023 budget).

Final Thoughts

Structured products have different names in the market. While some call it Market-linked debentures or Structured notes, they all mean the same. With a minimum ₹1 lakh ticket size, they are accessible to many. However, before investing, understanding the product structure, its composition, terms, and returns can guide you better.

[Disclaimer: The information provided in this article is for educational and informational purposes only. Any financial figures, calculations, or projections shared are solely intended to illustrate concepts and should not be construed as investment advice. All scenarios mentioned are hypothetical and are used only for explanatory purposes. The content is based on information obtained from credible and publicly available sources. We do not guarantee the completeness, accuracy, or reliability of the data presented. Any references to the performance of indices, stocks, or financial products are purely illustrative and do not represent actual or future results. Actual investor experience may vary. Investors are advised to carefully read the scheme/product offering information document before making any decisions. Readers are advised to consult with a certified financial advisor before making any investment decisions. Neither the author nor the publishing entity shall be held responsible for any loss or liability arising from the use of this information.”]