Structured Deposits?

Understand capital-guaranteed products

A capital-guaranteed product is a structured product created by a bank to be sold mainly to retail investors. It is issued usually for a term of 5 years, is invested in the manner spelled out in a prospectus and carries a guarantee from a bank that the invested sum will be returned on maturity.

Several products of this nature were created and sold by many banks in Singapore to retail investors during the years 2000 to 2005. The interest rate on bank deposits fell below 2 percent during this period and investors wanted a higher return for their savings, without taking risk. The capital-guaranteed products appeared to meet their needs.

Most retail investors did not read the prospectus as they trusted the bank guarantee and the assurances given by the marketing staff of their trusted bank.

Several billion dollars were invested in these products during these years. On the maturity of most of these products, the investors were disappointed with the meagre returns — usually less than 2 percent for 5 years, or 0.4 percent per year. This was even lower than the yield on fixed deposits.

Not a bad read on the ills of a structured products sold by banks. Only buy if you really really know what you are doing.