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Definition: Structured Investment Products – SIPS
Structured Investment Products or SIPs are financial instruments that provide investors the flexibility of customizing their product mix, in managing their portfolio, on the basis of their individual risk-return objectives. Structured investment products are usually created by combining various asset classes based on the investor’s risk profile. SIPs generally involve exposure to varying risky investments including derivatives and equities, along with fixed income securities that offer fixed payments in the form of coupons and promised payback of the principal amount.
For example, consider a risk-averse investor who seeks complete protection of the principal amount. An SIP comprising a zero-coupon bond along with a call option on an underlying security such as a stock or an indexed investment can cater to this investor’s risk-return profile. If the SIP is purchased at face value, the zero coupon bond ensures protection of this principal amount, i.e. at the time of maturity, the investor will receive this amount irrespective of the value of the underlying asset. If the value of the underlying asset is greater than the strike price of the call option at maturity, the investor benefits from the intrinsic value of the option. Otherwise, the option expires as worthless and the investor only gets the principal invested.
SIPs offer the benefits of flexibility by customizing the product mix and provide protection of the invested capital depending on the investor’s tolerance to risk. Disadvantages include liquidity risk owing to the fixed term of the investment, credit risk and risk of losing part or whole of the invested amount.