Investment managers have worked to develop over the years. Asset managers in western countries have been offering products across asset classes such as equities, debt, foreign exchange, commodities, and so on for a long time now. However, in India the race has been comparatively slow in innovating and offering such products partly due to regulatory issues and partly due to the lack of investor awareness and acceptance.
There has been a significant effort by the investment managers to offer equity-linked derivatives structures in India in last three years, and many of the most sophisticated equity derivatives structured products have been introduced recently. They have developed significantly largely due to constantly changing market dynamics and therefore the changing investor appetite, which has encouraged the investment managers to innovate and modify constantly.
They are effective and efficient way it invest in hybrid structures that allow one to invest in debt while also participating in equity markets, without risking one’s capital and in certain cases, even guaranteeing at least a minimum return.
Most structures in India offer 100% capital protection. However if you’d like a more aggressive structure, capital protection may be a little less than 100%, depending on product design. As such they are mainly used within the secure part of a portfolio to increase returns with limited risks of capital. Equity derivative structured products can also be customized to meet an investor’s risk of return profile.
For one thing, they provide an opportunity to participate in equity markets coupled with capital protection or even return protection. This kind of product is best suited for investors who are very conservative, but who also want to enhance returns without taking any additional risk.
Equity derivatives structured products enable risk controlled access to volatile asset classes and alternative investment. In the current market scenario, these kinds of products offer fantastic risk minimized investment option in alternate asset classes.
They are an efficient diversification tool. They help diversify he portfolio management style, and hence provide a hedge in the portfolio in case of a difficult market situation.
They offer an efficient way for an investor to take advantage of given market scenario. Fund managers have been constantly churning various structures that suit the prevailing market and economic situations, which help the investor adjust to the caged scenario and accordingly make her or his investment decisions.
And equity derivative structured products let us minimize the frequency of interventions, which are too often guided by sentiment. These products are closed ended and mostly follow a predefined investment strategy that is executed in the beginning. One cannot make any changes latter in the structure. However, this can in some situations be detrimental to performance.
There are several types of equity derivatives structured products investors can choose fro the palette depending on their risk profile.
High fixed return products: These compare with debt products and offer a high yield on the portfolio and keep a measured equity participation, to ensure low-to-moderate risk Investing in such products also helps the investor get a higher post tax yield as these debentures attract long term capital gains tax for such structures that mature over a 365 day period where tax rate is lower than on fixed deposits.
Market neutral products: These are designed for investors who don’t have directional market views, and especially sited for highly volatile and uncertain market environments. These products are designed to yield better than market returns of the markets rise but pleasantly enough give similar returns even when the markets move downwards. Investors who have been historically investing in bank fixed deposits because of a strong aversion to risk should consider such product structures.
High equity participation: These products offer a high level of equity participation. However, they still hedge or limit the downside risk on the capital. These structures are ideal for investors who are aggressive and want significant participation in a rising market, and are willing to sacrifice their fixed income returns for that opportunity. However, these structures mostly do not allow positive participation if the markets are bearish.