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To understand the capital protection offered by a structured product, start by reading the repayment formula and its maturity date. Some formulas guarantee repayment of the invested capital at maturity, while others do not. The question is therefore what your investment’s formula specifically provides, and how that relates to the length of time you expect to keep your savings invested.
What does the repayment formula provide?
Formula-based investments, sometimes called structured products, take the form of funds or bonds. Their term is known in advance, and their repayment value at maturity is calculated according to a formula known at the time of subscription.
To calculate this value, formulas generally take into account the performance of a stock market index or a basket of shares. In the investment’s terms, look for the formula and the performance measure it uses. Review these details alongside the maturity date: they help you understand how the stated protection fits into the way the investment works.
Guarantee, partial protection or no guarantee
Capital-guaranteed investments ensure that the investor recovers at least their initial investment, excluding fees, regardless of how financial markets perform. The guarantee mentioned by the AMF concerns repayment at maturity. To understand what a stated capital guarantee covers, pay attention to both this date and the phrase “excluding fees”.
Some capital-protected funds guarantee at least part of the invested capital, even in an unfavorable scenario. Check which part of the capital is covered by the protection stated in your formula. Protection covering part of the capital should be understood differently from a guarantee covering the initial investment.
Non-capital-guaranteed investments offer no capital protection in an unfavorable scenario. Identify the situation described by your formula and ask yourself what it provides for in an unfavorable scenario. This distinction is particularly important if your main aim is to preserve your investment.
How should you interpret a protection barrier?
If the investment’s terms mention a protection barrier, identify the repayment conditions and the date on which they apply. Also look at how the formula takes into account the performance measure used for the investment. To understand what the barrier means in your contract, review these details together rather than relying on its name alone.
Then use the distinction between guaranteed capital, protection of part of the capital and non-guaranteed capital to formulate your questions. What part of the investment does the formula provide protection for? What does it provide for in an unfavorable scenario? At what maturity date is repayment calculated? Your investment’s terms are the starting point for answering these questions.
Beware of exiting before maturity
With these investments, application of the formula is assured only if the investor holds their units until the maturity date specified in the formula. A request to redeem before the end exposes the saver to a risk of capital loss, even if the formula provided a capital guarantee.
Before committing, check whether you can leave your savings invested for the planned term. If you are reviewing an investment you have already subscribed to, keep this distinction in mind before requesting a redemption: the protection presented in the formula must be read alongside its maturity date.
Some investments provide opportunities for early exit in a favorable scenario; in return, if the scenario is unfavorable, the capital is not guaranteed at maturity and the loss can be substantial. Therefore, examine both aspects of the formula: the exit opportunities provided for in a favorable scenario and the consequences of an unfavorable scenario.
Points to review before deciding
- The planned term and maturity date: do they match your time horizon for these savings?
- The repayment formula: what performance measure does it take into account, and how is it used?
- The stated protection: does it cover the initial investment or part of the capital?
- The unfavorable scenario: what does the formula provide for the capital in this case?
- Redemption before maturity: have you taken the risk of capital loss into account?
- Fees: have you noted the phrase “excluding fees” when the guarantee covers the initial investment?
These points are general information, not a personalized recommendation. Compare them with your investment’s terms before making any decision.