Understanding Structured Deposits
Key Takeaways
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The return on a structured deposit is usually dependent on the performance of an underlying financial instrument
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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.
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 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If the deposit is withdrawn early, you may not get back 100% of the money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.
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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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.
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.
Structured Deposits VS 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.
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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Checklist
Not everyone should invest in structured deposits. Before you invest, check that you:
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Want potentially higher returns but are also prepared for variable returns
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Understand how returns are calculated and are clear about the factors and scenarios that can affect returns
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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.
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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.
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Are comfortable with the credit risk of the bank offering the structured deposit. If the bank defaults, you could lose all of your investment.
Documents You Should Receive
There is no specific document to be provided by your financial advisory representative. However, he is required to tell you information about:
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The product’s features and risks, fees and charges, provisions for early termination
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Any warnings, exclusions or disclaimers which may apply
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The product provider