Structuring deposit options will provide an individual or business with the ability to maximize their potential in both total return and protecting the original capital that has been invested in a non-speculative manner. As compared to other speculative investment options, structuring deposits allow for fixed income return, along with some of the same mechanisms that enhance yields; they are also often tied to market indexes or pre-defined performance criteria.
When utilized appropriately, structured deposits can create a balance between the investor’s risk tolerance and maximizing total return on their investment. Prior to making a decision on whether or not to allocate resources to a particular product, it is imperative to understand how the product is structured (including the term), the duration, and liquidity requirements of the product.
1. Capital Protection – Review of Principal Protection Options
Many structured deposits provide partial or full capital protection at the time of maturity. The primary attraction of this feature is to those investors who have a very conservative investment strategy.
When reviewing principal protection features, consider the following elements:
Duration of the product
Percentage of the protection provided
Any early withdrawal penalties that may be associated with the product
The capital protection element provides an additional layer of risk reduction to the downside.
2. Return Mechanism – Evaluating Return Potential
Potential returns for structured deposits are typically based upon the index or benchmark to which the deposit is tied.
Several common types of return mechanisms include:
A fixed return with a conditional bonus
Capped upside market linkage
Dual trigger payout models
Having a clear understanding of the return mechanism will prevent unrealistic expectations from developing.
3. Tenure Alignment – Evaluating the Length of Time the Investment Must Remain Locked-In
One of the most significant factors that need to be considered when evaluating the appropriateness of a structured deposit is the length of time that the funds must remain locked-in.
To ensure that you do not inadvertently place your emergency fund into a long-term product that will leave you without access to cash if needed, evaluate your current level of liquidity needs prior to allocating to a long-term product.
Evaluating your level of liquidity will enable you to develop a plan that will give you the freedom to withdraw your money if needed.
4. Comparison of Structured Deposit Returns to Traditional Alternatives
In addition to comparing the returns of structured deposits to each other, it is also important to compare the returns of structured deposits to traditional alternatives that have lower risk profiles such as fixed deposits or government securities.
Comparing risk-adjusted returns will help to clarify the opportunity cost of investing in a structured deposit.
Structured evaluation will improve the efficiency of your investment decisions.
Conclusions
Understanding the protection level, payout mechanism, tenure, and comparative value of structured deposits will help to ensure that you are able to achieve the highest possible total returns through the use of structured deposit strategies. If structured deposits are used properly, they will provide a balance of protection and moderate yield enhancement. Understanding what is being evaluated will help you make informed decisions that support disciplined growth in your capital.