One of the famous rules of investing is — never lose money. There is one kind of investment vehicle that are attractive to investors looking for downside protection, at the same time who would also like to see gains from upside movements in the markets.

Simply put it this way – you want to earn money when the market ist good. But you don’t want to lose money if the market goes down.

Cultural VICTORY
Creative Commons License photo credit: MShades

In a volatile market like the current situation, a structured fund is being regarded as a safe heaven by most conservative investors.

What is a Structured Fund

From Investopedia:

A fund that combines both equity and fixed-income products to provide investors with a degree of both capital protection and capital appreciation. These funds use fixed-income securities to give the fund capital protection through principal repayment along with the added gain of interest payments. The fund uses options, futures and other derivatives, which are often based on market indexes, to provide exposure to capital appreciation.

A structured investment product is generally a pre-packaged investment strategy which is based on derivatives (ie. options etc) but which features protection of principal if held to maturity.

For example, an investor invests 10,000 ringgits, the issuer simply invests in a risk free bond which has sufficient interest to grow to RM10,000 after the 5 year period. For example, this bond might cost RM8,000 today and after 5 years it will grow to RM10,000. With the leftover funds the issuer invest in special derivatives needed to perform whatever the investment strategy is.

The two common elements in a Structured Product are:

1. A bond product or another element of capital safeguard.

2. An alpha generator – which is any financial instrument (i.e. a stock, currency, etc.)

Recently Launched Structured Funds

PNB Structured Investment Fund
Tenure: 5 years
Exposure: structured products issued by Deutsche Bank Malaysia, which may include bonds, stocks, equity-linked and hybrid products
Minimum: RM10,000
Service fee: 1.5% of NAV
Management fee: 1% p.a.
Trustee fee: 0.08%
Repurchase fee: 2.5% within 1st year, 2.0% within 2nd year, 1.5% within 3rd year, 1.0% within 4th year, and 0.5% within 5th year.

Takaful’s myAl-Afdhal Capital Protected Investment Plan
Tenure: 5 years
Exposure: syariah-compliant global equity and commidities
Minimum: RM7,000
Closing Date: June 15, 2008
Service Fee: 3.5% of NAV
Management FEe: 1% p.a. of NAV

Great Eastern Centennial Max Plan
Tenure: 5 years
Exposure: Euro and US equity index
Minimum: RM20,000
Service Fee: 5% of NAV
Management Fees: Nil
Repurchase fee: Nil

Prudential Jade Structured Fund
Tenure: years
Exposure: China
Minimum: RM1,000
Closing date: May 29, 2008
Service fee: 2.5% of NAV

RHB Commodities Capital Protected Fund
Tenure: years
Exposure: Over-the-counter option linked to the performance of futures contracts of four commodities
Minimum: RM5,000
Closing date: May 29, 2008
Service fee: 3.5% of NAV

AmAsia Star
Tenure: 3 years
Exposure: call options on a multi-asset index
Minimum: RM5,000
Closing date: June 25, 2008
Service Fee: up to 2% of the single premium upfront

Comparing Structured Funds

Because a structured fund is capital protected when held to the maturity of 3-5 years, some consideration to be made are:

Tenure: Will you need the money within 3-5 years? Some funds charge a repurchase fee or withdrawal fee before maturity.

Cost: The lower the service fee, the better it is. Some funds has management fees and also withdrawal fees. I would opt for the lower initial service fee if all other condition are similar.

Insurance protection: Some funds are managed by insurance companies and there is normally an additional 25% sum assured given to the fund holders. Fund managed by insurance companies can be nominated according to Insurance Act. If it is done right, your money will skip the probate, meaning faster for your family to get your money.

Exposure of derivatives: Do you want more exposure in commodities, global index, or currencies? It depends on your asset allocation.

For illustration purposes, I’ve done a simple comparison between Centennial Max Fund and PNB Structured Investment Fund.

The Centennial Max plan requires 5% service fee upfront, and no other hidden charges thereafter such management fees, trustee fees, policy fees, insurance charges etc. At the meantime, PNB SIF requires 1.5% service fee, 1.0% management fees p.a., 0.08% trustee fee p.a.
By assuming the average return of both funds is the same 6% p.a every year until maturity, we can calculate the “assumed” return when the funds mature. Please note that the table below is generated for assessing the cost of investment. It doesn’t represent the real investment return of the said funds.

Centennial Max FundService Fee:5%
YearInitial InvestmentZero Management Fee
2008100000.0095000.00
2009100700.00100700.00
2010110770.00110770.00
2011117416.20117416.20
2012124461.17124461.17
2013131928.84
PNB-SIF
Service Fee: 1.5%
YearInitial Investment1%
Management Fee
2008100000.0098500.00
2009104410.00103365.90
2010109567.85108472.18
2011114980.51113830.70
2012120660.54119453.94
2013126621.17

The Centennial Max Plan might incur a lower investment cost in this case, thus giving a higher maturity benefit. Moreover, insurance benefit is provided at no additional cost.

Please bear in mind that cost of investment is just part of the big picture. You still need to consider the investment exposure of the fund.

Disclaimer:
Materials provided in this article are for information purposes only, and should not be considered an offer, or solicitation, to deal. How you choose to act on these information is entirely on your own.


KCLau
KCLau

Personal finance author and trainer

    17 replies to "Picking the right Structured Fund"

    • […] presents Picking the right Structured Fund posted at KCLau#8217;s Money Tips. One of the famous rules of investing is — never lose […]

    • KCLau

      Thanks for your explanation. Nowadays, no investment is guaranteed for
      long term.

      https://www.kclau.com
      Via iphone (爱疯)

    • Fraternity Caps

      i would like to enlighthen the future-investors our there on the difference of the terms “cap. protected” and “cap. guaranteed”. these two terms have a totally different meaning in the financial world. alot of layman have this misconception that they r the same bu its not. “cap. protection” only mean that the investment house will take all the precautionary measures & in their best ability; ie due diligence, risk mitigation & etc to 'protect' our investments, and its not a guarantee that u will get back your cap. in full if the investment turns bad. “cap. guaranteed” is what it means. so far i dont think there's any financial institution that offers “cap. guaranteed”.

    • […] presents Picking the right Structured Fund posted at KCLau’s Money Tips, saying, “About picking the right structured funds and all […]

    • Hanson

      maybe someday we can look into the possibility of setting up a forum which will benefit more people on our country. I am based in KL and you are in Penang. Anyway my blog is an experimental one, thank you very much for your feedbacks!

    • Hanson

      beats me! Maybe need to do some research first before commenting 😉

      For the above, could you insert the underlying fund strategy of the different structured products? as you may have already have all the available info on hand. The Centennial Max has one major differentiation, it is based on Long Short method. In overseas market, investors can sell stocks first and buy later, this is call short. So whether the market is up or down, the investor can still find money making opportunity. So unlike our Bursa, which only allow buy (long) only. So it is more possible for Centennial Max achieve a consistent return as compared to the funds invested locally. Locally we can only buy and hold, when market down, everybody loss money.. so pls let us know the strategy, very crucial!

    • Carnival of Equity Trading #10 – June 15, 2008…

      Trackback for Carnival of Equity Trading #10 – June 15, 2008…

    • […] presents Picking the right Structured Fund posted at KCLau’s Money Tips, saying, “About picking the right structured funds and all […]

    • Hanson

      this is an awesome piece of writing! Please note that there is a difference between capital guaranteed fund and capital protected fund. I wonder how many in the market is a true capital guaranteed fund

      • KCLau

        @ Hanson,

        Hi Hanson, I follow your blog and it is great. Hope you can enlighten us about the difference between capital guaranteed and protected.

    • RockYourVote.net

      How to Choose the Right Structure Fund | Personal Finance Money Tips…

      About picking the right structured funds. Also discusses the fundamentals of structured funds….

    • investlah.com

      How to Choose the Right Structure Fund | Personal Finance Money Tips…

      An article on how to choose the right structured funds for your need. Also, the basics of structured funds….

    • Relax

      it looks like a quasi balanced fund.
      do you think a mixed portfolio of equity + bond fund is a better choice?

      • KCLau

        @ Relax,

        That depends on your investment objective. Bond fund is never guaranteed.

    • Wei Li

      PNB SIF does not allow distribution reinvest. What do you think about PB Asian ACES?

      • KCLau

        @ Wei Li

        I think PB funds managed by Public Mutual Bhd. has a good track record.

Leave a Reply to Carnival of Financial Learning #4 | Financial Learn Cancel Reply

Your email address will not be published.