STRUCTURED INVESTMENT PLAN A GOOD SAVING FOR RETIREMENT LIFE

WHAT IS SIP?

Structured investment products, or SIPs, are types of investments that meet specific investor needs with a customized product mix. SIPs typically include the use of derivatives. They are often created by investment banks for hedge funds, organizations, or the retail client mass market. SIPs are distinct from a systematic investment plan (SIP), in which investors make regular and equal payments into a mutual fund, trading account, or retirement account in order to benefit from the long-term advantages of dollar-cost averaging.

Why should you SIP?

One, it imparts financial discipline to your life. Two, it helps you to invest regularly without wrestling with market mood, index level, etc. For example, if you are supposed to put a fixed amount every month in a mutual fund scheme, you need to find time to do it. When you have the time, you might be worried about market conditions and think of postponing your investments. Or you might be thinking of investing more if the mood is optimistic. SIP puts an end to all these predicaments. The money is automatically invested regularly in a scheme without any effort on your part.

Understanding Structured Investment Products (SIPs)

A structured investment can vary in its scope and complexity, often depending on the risk tolerance of the investor. SIPs typically involve exposure to fixed income markets and derivatives. A structured investment often starts with a traditional security, such as a conventional investment grade bond or a certificate of deposit (CD), and replaces the usual payment features (such as periodic coupons and final principal) with non-traditional payoffs, derived not from the issuer's own cash flow, but from the performance of one or more underlying assets.

A simple example of a structured product is a $1000 CD that expires in three years. It doesn't offer traditional interest payments, but instead, the yearly interest payment is based on the performance of the Nasdaq 100 stock index. If the index rises the investor earns a portion of the gain. If the index falls, the investor still receives their $1000 back after three years. This type of product is a combination of a fixed income CD a long-term call option on the Nasdaq 100 index.

Pros and Cons

 

Advantages of SIPs include diversification beyond typical assets. Other benefits depend on the type of structured product, as each one is different. Those advantages may include, principal protection, low volatility, tax efficiency, larger returns than the underlying asset provides (leverage), or positive yields in low yield environments.

The disadvantages include complexity which can lead to unknown risks. Fees can be quite steep, but are often hidden within the payout structure or in the spread the bank charges to enter and exit positions. There is credit risk with the investment bank backing the SIPs. There is usually little or no liquidity for the SIPs, so investors must take the price the investment bank is quoting or may not be able to exit before maturity at all. And while these products may offer some diversification benefits, it isn't always clear why they are needed or under what circumstances they are needed other than to generate sales fees for the investment bank creating them.