Structured Investments: What are the factors I should consider before investing in structured products?

Structured investments are complex products and may not be suitable for all investors.

They are intended as "buy and hold" investments and are not liquid investments.

You must ensure that you have fully understood all the features of the investment before you make any commitment.

Do not make any commitment in a rush or be influenced by the marketing staff without having sufficient understanding of the product.

Remember that you may have to bear all fees, expenses and/or investment losses if you decide to sell it or switch to another product before it matures (e.g. if the investment risk is higher than what you are prepared to take or the protection benefits provided do not meet your needs).

Seek professional advice if you need.

Below is a step-by-step checklist to assist you:
Checklist Tick, where appropriate
Obtain explanation on the investment:
  1. How does the structured investment work? What underlying assets do the structured investment invest in? How risky are these underlying assets? Ask for illustration, if unclear.

  2. What is the potential return offered? Is is realistic?
    (Beware of any promises and guarantee of high return). When will you receive the payout?

  3. Can you withdraw from the investment before it matures and what is the effect on early withdrawal? What are the penalties, restrictions and procedures if you decide to sell or withdraw some or all of your investments earlier?

  4. What are the types of investment risks and other factors (e.g. market risk, liquidity risk, etc) that will affect the return?

  5. What are the types of fees and charges imposed? Is there a limit on the charges? Can the banking institution change the charges at its discretion?

  6. Are there alternative investments that give you similar benefits? How does the recommended investment compare with the alternative investment?
Ask why the investment is suitable for you. The explanation should refer to the purpose of your investment, your willingness to take risks, investment time line, personal circumstances and how you will benefit from the investment?

Assess the explanation given to you by the banking institution.

The investment will not be suitable for you if:
  1. Your goal is to receive a regular income.

  2. You need to use the funds before the maturity date.

  3. Your risk tolerance level is low, i.e. you feel uncomfortable if you do not receive any income from your investment.
Assess whether you have sufficient knowledge on how the structured investment works and the risks of the underlying assets.

In the case of an investment linked to interest rates, e.g. KLIBOR
  1. Do you know what KLIBOR is?

  2. Do you know what are the factors that will affect how KLIBOR moves?

  3. Do you know how KLIBOR has moved in the past?

  4. Do you have any views on how KLIBOR will move during the investment period?

  5. Do you know the potential losses in the worst case scenario?

  6. Do you know how your return is computed?

  7. Should you rely on past behaviour of the underlying asset to make a decision? Always remember that past behaviour of any investment is not indicative of its future performance. Do not make your decision based solely on past trends.

Note: The questions above would also be applicable to structured investments linked to other underlying assets.
If you were to purchase the structured investment, how can you monitor the performance of your investment? What reports and updates will you receive and how frequent will you receive these reports and updates?
Assess whether you need to seek professional advice.

Note: Depending on market conditions and your specific investment needs, structured investments may or may not be suitable for you. You should ask qualified investment professionals to explain the risks and returns of the investments under various market conditions.
Make a final assessment before you commit to the investment.
  1. Does the product meet your investment objective and needs?

  2. When are the proceeds from investment payable to you?
    Can you afford to stay invested for the specific duration required of you?
    Do you need the money earlier?

  3. Are you comfortable with the level of risk that comes with the investment?

  4. What is the amount of losses that you are prepared to incur? What are the potential losses in the worst-case scenario?

  5. Have you read and understood all the information including the terms and conditions, benefits illustration, product summary, contract warnings, including the fine print with the marketing staff? Seek clarification if you have any doubts. Never sign a blank form.

Reprinted with permission from BankingInfo (A Consumer Education Programme by Bank Negara Malaysia)

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