Among the many investment options available today, structured funds stand out for their unique blend of growth and safety. Structured funds are investment vehicles that blend equity-linked products and fixed-income instruments to create a diversified portfolio. Their primary goal is to offer capital protection while allowing for capital appreciation. These funds typically invest in derivatives, such as options and swaps, to replicate the performance of an index or market without directly investing in its components.
Key Takeaways
- Structured funds combine fixed income and equity exposure, using derivatives for returns.
- They offer capital protection with limited upside based on index performance.
- Suitable for HNIs and risk-conscious investors seeking diversification.
- Risks include counterparty default, market volatility, and lack of transparency.
How Does A Structured Fund Work?
A structured fund uses derivatives to gain exposure to market indices. Instead of buying the underlying assets (like stocks or bonds), they often enter over-the-counter (OTC) index-linked swaps with financial institutions.
There are two main types of swap structures:
- Funded Swap: Investor funds are handed to the swap counterparty, and returns are based on index performance. Exposure is collateralised up to 90%.
- Unfunded Swap: Funds are invested in securities, and returns from these are exchanged for index performance.
This mechanism offers returns based on the market while managing downside risk. However, it also introduces counterparty risk, depending on the reliability of the financial institution involved.
Read More About: What is Mutual Fund?
Example of What is a Structured Fund
Suppose you invest ₹10,000 in a structured fund:
- ₹8,000 (80%) is invested in debt instruments yielding 7% annually for 3 years, growing to ₹9,680.
- ₹2,000 (20%) is invested in a market index like Nifty.
- If Nifty doubles: You earn ₹8,000 on the ₹4,000 invested.
- If Nifty drops by 50%: That portion becomes ₹2,000.
Common types include Collateralised Debt Obligations (CDOs), Collateralised Mortgage Obligations (CMOs), synthetic instruments, credit default swaps, and asset-backed securities.
Final Returns:
- In a bullish market: ₹17,680
- In a bearish market: ₹7,680
Your capital is protected with potential for upside.
Types of Structured Funds
Structured finance has evolved since the 1980s. Common types include:
- CDOs (Collateralised Debt Obligations)
- CMOs (Collateralised Mortgage Obligations)
- Synthetic Instruments
- Credit Default Swaps
- Asset-Backed Securities
Who Can Invest in a Structured Fund?
A structured fund can be considered by:
- Investors seeking capital protection with moderate returns.
- HNIs looking to diversify into low-risk, market-linked products.
- Corporations and governments using structured financing for portfolio management.
Note: Most structured funds in India require a minimum investment of ₹25 lakhs, making them suitable primarily for high-net-worth individuals.
Risks to Consider Before Investing in a Structured Fund
- Counterparty Risk – Default by the swap provider could lead to losses.
- Market Risk – Poor performance of the underlying index may reduce returns.
- Concentration Risk – Involvement of related entities may create bias or conflicts.
- Collateral Enforcement – Legal complexities can delay or restrict asset recovery.
- Transparency Issues – Proprietary indices may lack clear methodology or data access.
How to Invest in a Structured Fund?
- Understand the Product: Know how the fund works, its underlying index, and risks.
- Choose Wisely: Select funds that match your financial goals and risk appetite.
- Open an Investment Account: With a bank or financial institution offering such products.
- Monitor Regularly: Review performance and fund updates periodically.
Conclusion
Structured funds provide a unique hybrid investment opportunity for those seeking safety with a touch of growth. While they offer potential for attractive returns with reduced risk, understanding the structure and associated risks is critical. Always consult a financial advisor before investing and ensure the product aligns with your investment goals and risk profile.
Structured funds aren't for everyone. But if used wisely, they can be a powerful tool in a well-diversified portfolio.