10 reasons to consider structured investment plans
Structured investment plans offer certain features which make them unique within the wide range of investment options available in the market. Here we give you our Top 10 reasons to consider this type investment.
1. Defined return and defined risk
One of the main features of structured investments is that the potential returns on offer are stated up front, and so are known before you commit your capital. This allows the investor to consider the potential upside in the context of the amount of risk they are taking, since you know at the outset exactly what needs to happen in order to achieve any stated returns as well as a return of your initial investment. This can then be used to make an informed decision about whether to proceed or not by comparing the defined return and defined risk, with alternative investments as well as the returns available from cash deposits.
2. Some capital protection against a falling market
Understanding the risk versus reward of an investment is an important consideration, especially since the opportunity to receive higher returns than might be available from cash deposits inevitably requires the investor to put their capital at risk. Structured investments nearly always contain what is known as conditional capital protection, which means that provided the underlying investment (commonly the FTSE 100 Index) does not fall by more than a fixed level or percentage (usually 40% or 50%), your initial capital will be returned in full.
This fall is measured either throughout the term of the plan or at the end of the investment only, and means that the investor can take more of an informed decision based on whether they consider this to be a fair trade off for the potential upside. If the underlying investment does fall below this ‘barrier’ your capital will be reduced by 1% for every 1% fall, and so there is a risk that you could lose some or all of your initial capital. Also remember that past performance is not a guide to future performance.
3. Fixed term
Structured investment plans also have a fixed term, normally between 5 and 6 years. With most income and growth plans this means you know the term of the investment at the outset so can plan around this accordingly. Although you do have the option to withdraw your money during the term, early withdrawal could result in you getting back less than you invested and the plans are really designed to be held for the full term.
Another popular structured investment is the autocall, or ‘kick out’ plan as they are more commonly known. These plans have the potential to mature early, or ‘kick out’, on set dates during the plan, often as early as the end of year one. Whether they do or not is dependent on the performance of the underlying investment usually being higher that its value at the start of the plan. If it is, the investor receives the stated return along with a return of their initial capital, but if the plan does not kick out during the full term of the investment, your capital will at risk as with other types of plans.
4. Potential to beat the market
Since many structured investments are designed to provide returns even if the market has stayed relatively flat, investors also have the potential to beat the market. Kick out plans are a good example of this whereby even if the underlying investment is only up by a small amount, the plan may mature early providing investment level returns as well as a full return of capital, thereby offering the opportunity to outperform the underlying investment.
5. Defensive investments
Another feature which is unique to structured investments is that some plans are designed to produce investment level returns even if the stock market falls up to a specified level (which is known at the outset). With the FTSE recently reaching its highest level on record, some investors are perhaps thinking twice about investing right now. So for those who are uncertain that the market will continue to rise in the coming years, this type of plan, collectively called defensive investment plans, may well appeal. The opportunity to achieve a return on your capital even if the underlying investment falls in value shows a unique feature of structured investments being able to achieve investment level returns in what would be considered poor market conditions.
6. Fixed income investments
Some of our most popular structured investments are income plans, which offer a fixed and regular income. This means you know exactly how much income you will paid, when and for how long, which is unique within the range of investment options available in the market. Since most income investments have variable incomes, it is perhaps understandable why these fixed income investments have proved so popular. Some of these also offer monthly payments since this seems to be the most useful in terms of budgeting, especially if you are looking to supplement existing income. Many other income investments that promote their yield only offer biannual or quarterly payments.
7. No ongoing charges
All of the charges within structured investment plans are taken into account in the headline return, so there are no hidden surprises. This should be compared to a typical UK equity fund which will often have annual costs associated with the management of funds. These charges are levied each and every year in both actively managed and tracker or ‘passive’ funds, which in part helps to explain the number of funds which find it difficult to outperform the FTSE 100 Index, especially over the medium term. This ongoing cost is not a feature of structured investments.
8. Tax efficient – New ISA friendly
All of the structured investment plans that are available through Fair Investment Company accept New ISA investments (current 2015/16 limit of £15,240) and you are also able to transfer existing Cash ISAs and/or Stocks & Shares ISAs. Any income or growth returns paid from an investment held within an ISA is not then subject to tax, an attractive feature in any economic climate. Since these investments are normally offered for a limited period, please always note any New ISA or ISA transfer application deadlines. Please note that this information is based on current law and practice which may change at any time.
9. FTSE linked
Many structured investment plans are linked to the performance of the FTSE 100 Index, which is widely recognised as the proxy benchmark for most investment managers. Since the historical volatility is familiar to many investors, they are in a better position to consider the pros and cons of the plan within the context of the underlying investment.
10. A disciplined approach
Finally, the mechanics of these investments removes the need for the investor to worry about when to come out of the market since the decision is made for them by the pre-determined market conditions required for the plan to mature or it simply comes to the end of the plan term. Should the plan mature, the investor then has the opportunity to reassess their options based on the market conditions at that time.
No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.
Tax treatment of ISAs depends on your individual circumstances and legislation which are subject to change in the future. ISA transfer charges may apply, please check with your provider.
Different types of investment carry different levels of risk and may not be suitable for all investors. Structured investment plans are not capital protected and there may be the risk of losing some or all of your initial investment. There is also a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated, in which case you may not be entitled to compensation from the Financial Services Compensation Scheme (FSCS). In addition, you may not get back the full amount invested if the plan is not held for the full term. The past performance of the FTSE 100 Index or any shares listed within the Index is not a guide to their future performance.