Structured Deposits



What is a structured deposit?

A structured deposit combines a deposit with an investment product. The return on a structured deposit depends on the performance of an underlying financial asset, product or benchmark. These may include market indices, shares, interest rates, market indices, bonds or other fixed-income securities, foreign exchange rates, or a combination of these.

A structured deposit is different from a fixed deposit. Structured deposits may provide the potential for higher returns compared to fixed deposits, but you take on more risks when you buy a structured deposit, including the risk that you receive returns that are lower than expected.

At maturity, you will receive the principal amount of the structured deposit. But just like traditional deposits, the return of the principal and any returns is subject to the credit risk of the bank holding the deposit. If the deposit is withdrawn early, you may not receive 100% of the money invested back.

Please note that structured deposits are not protected under the Deposit Insurance Scheme. 

What is the return?

Your return is variable and depends on the performance of the underlying financial asset, product or benchmark. These may include market indices, shares, interest rates, bonds or other fixed-income securities, foreign exchange rates, or a combination of these.
Your return is calculated according to a formula set out in the structured deposit’s terms and conditions.

The returns you receive may further depend on whether there is

i) a "cap" on the underlying financial asset, product or benchmark; and / or

ii) a participation rate.

Example: A 5-year structured deposit that is linked to an equity index rises by 20% at maturity:

  • If there is a "cap" (maximum return) of 15%, your return will not be more than 15%.
  • If there is a participation rate of 40%, you will only participate in 40% of the 20% rise in the equity index, i.e. 40% x 20% = 8%.
  • If your return is subject to both the "cap" and the participation rate, you will receive 40% of the 15% "capped" return. Your potential return is therefore 40% x 15% = 6%.

The final return in each of the examples above is not the effective rate of return. Do ask the bank for the effective rate of return.

Why do people invest in structured deposits?

Structured deposits provide the potential for higher returns compared to fixed deposits, but you are exposed to more risks when you buy a structured deposit.

Structured deposits may be suitable for investors who want exposure to assets or markets which are not easily accessible to retail investors.

Investors receive the principal invested if the structured deposit is held to maturity, provided there is no default on the part of the deposit-taking bank.

What is the maximum amount you can lose?

You may lose some or all of your return depending on how the return is structured and whether the underlying financial asset, product or benchmark underperforms. The principal amount you invest is also subject to the credit risk of the bank your structured deposit is held with. Further, if you withdraw the deposit early, you may not receive 100% of the principal you invested.

Are structured deposits suitable for everyone?

Not everyone should invest in structured deposits. Do not consider this type of investment if you:

  • Want potentially higher returns BUT are not prepared for variable returns which include the risk of not receiving a substantial part of the interest payable on the deposit or receiving lower than expected returns;
  • Do not understand how returns are calculated or are unclear about the factors and scenarios that can affect returns;
  • Do not understand the risks associated with the structured deposit. Structured deposits use derivatives to hedge risks and/or to improve performance. Investors should be aware of the risks associated with the use of derivatives, including the risk that the provider or counterparty of the derivative defaults.
  • Are not prepared to leave your money tied up for the periods required. If you need to convert your investments to cash in the short-term to meet specific needs every now and then, a structured deposit may not be suitable for you.
  • Are not comfortable with the credit risk of the bank offering the structured deposit. If the bank defaults, you could lose all of your investment.

What features and risks do structured deposits have? How do they compare with fixed deposits?

Here is a comparison of the main features and risks of structured deposits and fixed deposits. Check the terms and conditions of the structured deposit for details:

Features  Structured Deposits S$ Fixed Deposits
Minimum deposit A higher minimum investment amount may be required (usually $5,000). Minimum amount for a fixed deposit can be less at $1,000.
Maturity Maturity periods vary from 2 weeks to 10 years. Maturity periods from 1 month to 3 years.
Principal Principal (or capital) will be repaid in full at maturity or if bank redeems (or “calls”) deposit before maturity. Principal (or capital) will be repaid in full at maturity.
Returns Potentially higher returns compared to fixed deposits. But you are exposed to more risks. Returns depend on performance of underlying asset or index.

Returns you receive may further depend on: i) "cap" rate on underlying asset or index; and / or ii) participation rate.
Returns on fixed deposits are usually lower. Funds are normally placed in money markets for a short period of time (for example, overnight).
Risks involved Riskier than traditional deposits because returns depend on performance of other assets or indices. You may receive no returns although you would be repaid principal invested at maturity.

Where a structured deposit is callable, you may be exposed to reinvestment risk, i.e. risk of having to reinvest your money at less attractive rates.

Investor is also exposed to credit risk of deposit-taking bank, i.e. risk that bank defaults on payments due to you.
Fixed deposits are considered low-risk as banks are obliged to repay the principal in full at maturity.

However, depositors are exposed to credit risk of deposit-taking bank, i.e. risk that bank defaults on payments due to you.
Early withdrawal by depositor May lose part of return and / or principal if deposit is withdrawn before maturity. Amount repaid depends on market value of underlying asset or index linked to structured deposit.

Structured deposits may not be valued daily. If so, you may not be able to withdraw your deposit immediately.
Early withdrawal may attract certain bank charges.
Early redemption / callable by issuer (variable maturity) Structured deposit may allow bank to "call" or redeem the deposit early. This means the maximum returns to you are capped. You should receive full amount of principal invested if the deposit is redeemed early.  No early redemption by bank.
Deposit Insurance Scheme Structured deposits are not covered by the Deposit Insurance Scheme. Fixed deposits are covered by the Deposit Insurance Scheme.
Guaranteed payments Some structured deposits provide higher guaranteed early payments compared to traditional fixed deposits. Such payments are usually only for the first few months or years; payments in later years may be variable. Ask about the effective rate of return for the structured deposit you are considering. Interest is guaranteed and fixed throughout term of fixed deposit (provided there is no early withdrawal).

What types of structured deposits are available?

Here are some of the types of structured deposits available:

Type of structured deposit  Description 
Equity-linked May be linked to return of a single share, basket of shares, equity index (for example, the S&P 500) or a basket of indices.
Bond-linked May be linked to return of a single bond (for example, Singapore Government Securities), basket of bonds, bond index, or a basket of bond indices.
Interest rate-linked
  • May be linked to a specified floating interest rate (for example, the Singapore Interbank Offer Rate).
  • Returns may be directly linked to the specified interest rate, i.e. if the specified interest rate rises, your returns will rise and if the interest rate falls, your returns fall. But some returns are inversely related, i.e. when the specified interest rate falls, you get better returns and if the interest rate rises, your return falls. Such products are usually called "inverse floaters" or "reverse floaters".
  • Payments may also rise or "step up" on fixed dates if deposit is not redeemed by issuer.
Credit-linked May be linked to credit quality of a specified entity or entities. If there is a "credit event" (for example, if specified entity becomes insolvent or defaults on its loans), there may be no return for investor.

What to watch out for - What can cause me to lose money?

You can lose money if the underlying asset or index performs below your expectations.

Here is a brief description of the key market risks involved for some commonly available structured deposits:

Type of
Structured Deposit
 
Key market risk involved
Equity-linked The underlying share, basket of shares, share index or basket of indices, may not move in the direction and / or by the amount you expected.

If returns are capped, you bear the risk of foregoing potentially higher returns that you could have received from investing directly in the underlying asset.
Bond-linked The underlying bond, basket of bonds, bond index or basket of bond indices, may not move in the direction and / or by the amount you expected.

If returns are capped, you bear the risk of foregoing potentially higher returns that you could have received from investing directly in the underlying asset.
Interest rate-linked Returns depend on the direction and / or amount by which interest rates move. You are exposed to risk that interest rates do not move in the direction and / or by the amount you anticipated.
Credit-linked Returns are exposed to the credit risk of specified entities and / or to the credit risk and change in market value of the underlying collateral, if any.

You must be able to assess the likelihood of a credit event occurring to specified entities as well as entities that constitute the underlying collateral.

In addition, some of the risks that apply generally to structured deposits are listed below. Please note that there may be transaction or unwinding costs associated with early or mandatory redemption which could lower the amount you receive.

Risks Explanation 
Reinvestment risk If a structured deposit is “called” or redeemed before maturity, you are exposed to reinvestment risk if you have to reinvest your money at less attractive interest rates.
Liquidity risk There is limited liquidity for structured deposits. You cannot sell a structured deposit to another investor. You can only deal with the bank holding your structured deposit.
Credit risk You are exposed to the credit risk of i) the deposit-taking bank and may be exposed to the credit risk of ii) the derivative counterparty, depending on the structure.

Credit risk refers to the risk of default by a bank (or the derivative counterparty) on its payment obligations when due.

Structured deposits are not covered under the Deposit Insurance Scheme.

What is a tranche?

Structured deposits may be offered in ‘tranches’. Each tranche has either a fixed offer period or is available until the tranche is fully subscribed. The tranches may come with differing features and returns.

What fees and charges are there?

Please check with your bank to find out about fees. If you make an early withdrawal, you may have to forgo some of your returns as there could be transaction or unwinding costs.

What documents should you receive?

There is no specific document to be provided by your financial adviser representative but he is required to tell you about the product’s features and risks, fees and charges, provisions for early termination, as well as any warnings, exclusions or disclaimers which may apply. He must also tell you about the product provider.

When choosing a structured deposit, consider the following:

i)  Your needs and goals/objectives, personal circumstances and risk profile 

ii)  Find out more about the structured deposit you are considering:

  • ensure that an investment in the structured deposit is in line with your own investment objectives;
  • ensure that you understand the factors that will impact your returns; are you familiar with the underlying financial asset, product or benchmark and are you comfortable with the exposure and the market view you are taking?
  • ensure you understand all the risks and are comfortable that they match your own risk profile;
  • you should be comfortable with the credit risk of the bank you are placing your money with.

iii)  Find out about alternative investment products and compare their risk-return profile and features with the structured product introduced to you.

 

The above information is prepared in collaboration with the Association of Banks in Singapore and Securities Investors Association (Singapore).