Play safe and win some

It pays to hedge in volatile times—at least banks offering the option of investing in structured products will agree with that. And at last count there were quite a few offering this service. These include SG Private Banking, ICICI Securities, Stanchart and—the latest to launch structured products—Barclays Capital. Says Nipun Mehta, Executive Director & Head-Private Banking, SG Private Banking India: “The market is passing through very uncertain times. Equity markets have come off substantially, debt markets are heading for tough times and the Indian economy seems to be facing some headwinds. Investors have faced a lot of discomfort as a result, and are looking for some level of certainty. This has highlighted the need for structuring product offerings to suit client needs.” Mehta adds that structures are being built across various asset classes to protect investors from the market turmoil.

“It is currently an untapped market and there is a huge potential for growth,” points out Dixit Joshi, Managing Director, Barclays Capital, as he goes on to explain the advantages of structured products. “Investors in India today are in an environment that limits them to just holding shares. But what if you don’t want the downside risk that shares have and yet want an upside— that would be the ideal situation. Structured products offer precisely this. They protect capital and also offer an upside of the participation in equity markets.”

In such climes, as Anup Bagchi, Executive Director, ICICI Securities, points out, it is structured products with principal-protected/capitalprotected structures that are evoking interest. These enable clients to protect their principal by foregoing some portion of an upside in case markets do look up.

Here’s how structured products work, in simple terms: If an investor puts Rs 100 in a structured product (with, let’s assume, a twoyear maturity), Rs 84 could be allocated to debt and Rs 16 to equity (the Nifty index). An 8 per cent interest on the debt component of Rs 84 will give approximately Rs 16 as interest in two years, which ensures that the principal (Rs 100) is intact. If we assume that the Rs 16 allocated to equity doubles in two years, the investor will get Rs 32.

Thus, at the end of the term, if the Nifty looks up, the investor gets Rs 132—in other words, a 32 per cent return on his investment. If the Nifty were to go down, the yield on the debt component would still protect the capital.

For the moment, Barclays Capital’s structured product will only have exposure to equities. But there are several alternative asset classes that SG Private Banking India is offering its clients. These include debt-related products and structured products through thirdparty partners.

While there is potential for structured products in India, there are challenges in terms of awareness. According to Bagchi, currently the ticket sizes are large at around Rs 10 lakh; hence these products are accessible only to relatively large clients. “We feel that for participation to increase, two conditions need to be met. First, the ticket sizes must come down to below Rs 1 lakh and secondly liquidity must be available at a reasonable cost against these instruments.”

—Anusha Subramanian