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As Nifty soars, brokers chase HNIs with structured products

Santosh Nair
moneycontrol.com

With the market on a tear, domestic brokerages are busy creating Nifty-linked equity products for high net-worth individuals with bigger risk appetite.

These are not purely passive investment products, because the returns do not exactly mirror the change in the index.

Officials at brokerages say they are getting enquiries from their affluent clients for structured products offering higher upsides even if it means taking on more risk.

This indicates that a growing number of investors feel the Nifty is likely to continue its uptrend for the next 2-3 years and that they stand a good chance of making handsome returns.

Broking industry sources say many HNIs had bought Nifty-linked structured products in 2012 when the outlook on the market was highly uncertain.

The products they purchased were mostly of a capital-protection nature, in which the downside was zero, but upside was lower than the actual Nifty returns. Depending on the downside protection on offer, the returns would be Nifty gain minus x%.

Many of the products—which had a tenure of between 24-36 months—are now maturing, and investors are pleased at their bets having paid off well.

Some of the products now on offer do not offer downside protection, and the returns could be even negative if the Nifty gains bellowed a pre-specified limit. At the same time, the upsides would be much higher once Nifty rises above the pre-specified limit.

One of the leading domestic brokerages is learnt to be pushing a product in which the threshold is 25 percent on the Nifty. If the Nifty gains up to 25 percent at maturity, the returns will be the actual return minus 25 percent. This means that if the Nifty gains 20 percent, the investors will see an erosion of 5 percent in his capital (20 percent minus 25 percent). But for every percentage point above 25 percent, there will be a multiplier factor.

This means that if the Nifty gains 26 percent, the investor could end up making a good few percentage points above that. The multiplier could vary depending on how high the Nifty rises. For instance, if the Nifty gains 50 percent, the returns could be as high as 75 percent.

So far, it is the domestic brokerages that are readying structured products for clients. Broking sources say it is a matter of time before the foreign brokerages follow suit. This could lead to a slew of such products hitting the market in the coming days.

A word of caution though. Anecdotal evidence shows that structured products launched in a booming market usually tend to give mediocre returns, and those launched in turbulent market conditions tend to give solid returns.

In other words, the best time to buy a structured product could be when they are not in fashion.

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