What is a structured deposit?
A structured deposit is essentially a combination of a deposit and an investment product which offers exposure to stock market linked returns whilst providing capital protection.
They are designed to be held for a fixed term, normally between 3 and 6 years, and the return is dependent on the performance of some underlying asset, which is usually the FTSE 100 Index. Unlike fixed rate bonds, these plans have variable returns and, in some case, variable maturities as well. This flexibility in design results in a wide range of options to choose from, whether you are looking for income or growth.
What are the advantages?
A structured deposit offers a balance of capital protection and the opportunity to receive returns which are linked to the stock market and so are often higher than those available from fixed rate bonds. By limiting the overall investment exposure, these plans are also able to offer capital protection, thus providing a return of your capital regardless of the performance of the index.
There are a number of different types of plan available to meet the needs of a wide range of savers. Some are designed with the potential to mature early, whilst others offer the potential for a high level of income each year, so plans can also benefit from a diverse range of market conditions.
What are the disadvantages?
The cost of the capital protection is that savers are unlikely to get the full benefit of any increase in the underlying index or the payment of dividends. The return of capital is also dependent on the solvency of the deposit taker and so you will need to consider carefully which institution you wish to deposit your cash with, as you would with any other savings product.
With flexibility in design also comes a wide range of complexity in how each product works and you should be sure you fully understand the product before proceeding. If the plan does not meet the requirements to achieve the stated level of income or growth and the saver only receives back their original capital, its value may have been eroded by inflation.