With such a wide variety of products available in the market, we take a look at one of the more popular solutions for investors and get an insight as to why these are rapidly becoming a competitive alternative for savers.
What is a Kick Out Plan?
Kick out plans are a type of structured product which offer the potential to mature early or ‘kick out’. The early maturity is dependent on the underlying performance of an asset, normally an index or a basket of shares.
The investor therefore has the benefit of knowing at outset the conditions that need to be met to provide the stated level of growth, thus providing a defined return for a defined amount of risk. The plans that follow an index are considered lower risk than those that follow a basket of shares, however the latter type of plan normally offers the higher returns.
When to consider?
Traditionally, these plans have proved particularly popular when stockmarkets are relatively low since this offers a higher likelihood the plan will mature early. With a typical plan having a maximum investment of 5 or 6 years, should the investor miss out in years 1 or 2, they still have a number of years remaining and the level of return keeps increasing year on year.
However, these plans also have a place when markets are high. Since a typical plan will mature early provided the asset value at the end of the year is the same of higher than at the start of the plan, the asset only has to stay the same for the plan to provide a return, potentially providing a higher return than the asset itself.
In order to have the potential for returns higher than those available from cash, the investor’s capital is normally at risk. Typically, capital will be returned provided the asset has not fallen below a specified level. Many plans use the FTSE 100 to this end and a typical barrier is 50% of the starting level of the index.
However, we have recently seen a rapid increase in the use of this type of product combined with capital protection. These structured deposits have greatly broadened the appeal and use of kick out plans to include those looking at savings accounts as well as businesses, charities and trusts.
Time for a closer look
The current climate of continued low interest rates and increasing inflation demands attention from both savers and investors. And with fixed rate bonds offering low rates it is important to consider all options.
The recent levels of the FTSE and the uncertainty that continues also lends itself to considering this type of plan and with such a wide range of options available, all levels of risk are catered for.
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The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. Different types of investment carry different levels of risk and may not be suitable for all investors.
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