Find out how structured deposits work and what you should know before you invest.
- The return on a structured deposit is usually dependent on the performance of an underlying financial instrument
- The full principal amount of the investment will be returned to you if you hold your investment to maturity, and the bank remains solvent
What are structured deposits?
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, bonds or other fixed-income securities, foreign exchange rates, or a combination of these.
Structured deposits may be suitable for investors who want exposure to assets or markets that are not easily accessible to retail investors.
What are the returns?
Your return is calculated according to a formula set out in the structured deposit’s terms and conditions.
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, including the possibility 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 If the deposit is withdrawn early, you may not get back 100% of the money invested.
Structured deposits versus fixed deposits
In the case of fixed deposits, the returns and maturity periods are fixed. Structured deposits, on the other hand, have variable returns, and in some cases, variable maturities as well.
Let's review the main features of structured deposits and fixed deposits:
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Structured deposits | Fixed deposits |
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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 period |
Varies from 2 weeks to 10 years. |
Varies 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 |
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Risks involved |
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Early withdrawal by depositor |
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Early redemption / callable by issuer (variable maturity) | Structured deposit may allow the bank to redeem (or "call") the deposit early. This means the maximum returns to you are capped. | No early redemption by bank. |
Covered by the Deposit Insurance Scheme? | No | Yes |
Guaranteed payments |
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What's the most 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 you?
Not everyone should invest in structured deposits. Before you invest, check that you:
- Want potentially higher returns BUT are also prepared for variable returns
- Understand how returns are calculated and are clear about the factors and scenarios that can affect returns
- Understand the risks associated with the structured deposit. Structured deposits use derivatives to hedge risks and 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 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 comfortable with the credit risk of the bank offering the structured deposit. If the bank defaults, you could lose all of your investment.
Types of structured deposits
Here are some of the different structured deposits available:
Equity-linked |
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Bond-linked |
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Interest rate-linked |
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Credit-linked |
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Note
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 are the risks?
Common risks associated with structured deposits include the following:
Withdrawal before maturity date |
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Credit risk |
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Reinvestment risk |
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No deposit insurance |
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Here is a brief description of the key market risks involved for some commonly available structured deposits:
Equity-linked |
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Bond-linked |
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Interest rate-linked |
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Credit-linked |
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Reinvestment risk |
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Liquidity risk |
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Credit risk |
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Fees and charges
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.
Documents should you receive
There is no specific document to be provided by your financial advisory representative. However, he is required to tell you information about:
- The product’s features and risks, fees and charges, provisions for early termination
- Any warnings, exclusions or disclaimers which may apply
- The product provider.
Before you buy: Things to note
When choosing a structured deposit, ensure that:
- Investing in the structured deposit is in line with your own investment objectives
- 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
- You understand all the risks and are comfortable that they match your own risk profile
- You are comfortable with the credit risk of the bank you are placing your money with
Find out about alternative investment products and compare their risk-return profile and features with the structured product introduced to you. Always ask whether the addition of this product to your investment portfolio will expose you to more risks than you are comfortable with.