Structure products are niche investment category In India & very much popular among UHNI population. The reason for their popularity is low cost, tax efficiency & better risk adjusted returns.
Structure products are being structured /designed to facilitate highly customised risk return objectives. This is accomplished by taking a traditional security such as a conventional investment-grade bond and replacing the usual payment features—periodic coupons and final principal—with non-traditional payoffs derived from the performance of one or more underlying assets.
Fundamentally, the returns from structured products are linked to traditional returns from underlying assets. However, they are combined with swaps, futures, and other derivative products to leverage higher participation in case of an upside or a downside. Structured Products offer the flexibility to the investors in choosing a customized payoff that typically is a combination of fixed and variable market linked return over the period of the investment suiting their own risk-return objectives with efficient tax planning. Structured products in India are often linked to NIFTY performance / 10 Year Gsec depending upon the category of structure product and downside protected up to the capital deployed (however not necessarily always).

Following are components of structure products:

1. A bond: The bond component ensures capital protection. At any point in time, if the underlying asset does not perform as anticipated, the investor gets the capital invested returned 100%.
2. One or more underlying equities: The underlying asset improves the return on the investment. The underlying would be a single instrument or a basket of instruments, which could be any asset class such as equity, debt, index, ETF, currency or interest rate.
3. A derivative of the underlying asset: The derivatives component helps determine the overall risk in the product. The commonly used derivatives are options on the underlying asset. The derivative determines that the instrument allows investors to achieve a targeted return on investment by customizing the underlying asset classes to meet set financial goals.

Features of Structured Products:

A. Tenure: These products are usually long-term in nature requiring a lock-in of at least 12 months and an investment horizon of 2-3 years to gain maximum returns.
B. Fees:Like any professionally managed financial instrument, structured products also attract fees that could vary.
C. A mix of conventional instruments: A structured product is always an amalgamation of multiple financial instruments integrated to achieve a pre-determined goal.
D. Ticket Size: Structured products require a minimum investment of Rs 10 lakhs .
E. Risk: The risk of structured products purely varies on the way they are structured. It can range from conservative to aggressive, depending on your preference.
F. Types: Structured products could be fully protected, partially principal protected, or without any principal protection investments.

How do structured products work to generate return?

Let's look at how basic debt and equity plans work. Let's take a scenario where you have Rs 100 for investing in a combination of equity and debt for three years. Assuming a simple interest rate of 10%, if you keep Rs 77 in a fixed deposit, it will grow to Rs 100 in three years, ensuring capital protection. The balance Rs 23 can be invested in the National Stock Exchange Nifty. If the Nifty gives a 30% return in three years, Rs 23 will become Rs 30. Thus, on maturity, the initial investment of Rs 100 will be Rs 130. However, if the Nifty falls 30%, Rs 23 will become Rs 16. The value of the investment on maturity will be Rs 116.
Considering the above example, let's assume that Rs 100 is invested in a simple capital protection product for three years. Out of this, Rs 77 is invested in debt for three years and grows to Rs 100 on maturity. The balance Rs 23 is used to buy call options, a derivative instrument for which a premium is paid to get the right to buy the Nifty three years later at today's price.
Let's assume that the premium for one call option is Rs 11.5. So, with Rs 23, we can buy two call options, implying two times the Nifty returns, or 200% participation in Nifty returns for a notional investment of Rs 100. Now, if the Nifty generates a 30% return in three years, the two call options will give a total return of Rs 60 (Rs 30 from each call option). The maturity value in this case will be Rs 100 from debt plus Rs 60 from options, totalling Rs 160 (as opposed to Rs 130 in the previous example). If the Nifty falls below the level at which the investment was made, the option will expire, leaving the maturity value at Rs 100.

Advantages

1. Highly Customizable: The product is designed to be customized uniquely for you.
2. Meet Varied Objectives: Structured products can be tailor-made to achieve your unique products. Be it growth, income, or a combination of both.
3. Monetize Market Views: You, as an investor, have the flexibility to customize a product that lets you benefit from your particular market views. Structured products are exceptional products to maximize from your ability to predict markets.
4. Choice of capital protection: You could also benefit from the capital protection clause by choosing such structured products.

Things to Keep in Mind

1. Liquidity Risk: Unlike other liquid instruments, structured products are not liquid. Given their intrinsic nature, they are not traded in the secondary market and are hence, not liquid. You should have accessible funds without relying on your structured products investments in case of any emergency. As an investor you should intend to hold the structure till maturity.
2. Risk Tolerance: Before investing in structured products, you must assess your tolerance level for risk and how much money you would be comfortable losing. Are you dependent on the income generated from structured products, or is it just the benefit from the upswing?
3. Issuer Risk: The 100% return of principal at maturity is subject to the credit risk of the issuer of underlying debenture. The overall demand for the Issuer’s products is linked to various micro and macro-economic parameters like GDP growth, business cycles, liquidity, etc,. Any adverse movement in these factors will have an adverse impact on the business of the Issuer and ultimately on the credit profile of the issuer.
4. Notional interest: If you get back just your principal, you have suffered a notional loss of interest, as this money could have been used to earn from other avenues such as debt instruments.
Structured products bring benefits of derivative investing to investors who do not have either access to these products or knowledge about them.