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I see many clients who have ‘CDs’ with the bank. Some of these are cash deposits that have to be tied up for a minimum of 1- 3 years to receive the interest quoted. So what’s wrong with these – nothing!! These are ‘Fixed Deposits’.
However, some are what we call Structured Deposits; where the return is determined by financial instruments including market indices, equities or a combination of these. Sometimes the banks don’t explain these properly, as many of my clients think, “the more stocks or indices the better.” After all they are always being told to ‘diversify’.
However, totally the opposite is true of Structured Deposits tied to the performance of, say, a basket of stocks. The more stocks, the less the chance of them all performing well. If one or two do not perform well, the whole year’s potential return is at risk.
There is nothing wrong with Structured Deposits per se, provided they fit in with your own objectives and risk profile. They can form part of an investment portfolio and your capital is usually protected at the end of the term. What’s wrong is that they are sometimes not explained properly.
What to look out for:
- Is there a potential for much higher returns that far exceed bank interest rates?
- Do you see or are you being shown a table or a list of different indices/company stocks that your investment is going to be reliant upon?
- What is the timescale?
- Is the principal amount only guaranteed if the CD is held for the full term?
If you can answer all these positively then you have probably signed up for a Structured Deposit, known fondly as a CD. ???
So what happens if I want to withdraw my cash early?
Structured deposits are meant to be held to maturity. Normally, your principal will be repaid in full only at maturity. If you withdraw your deposit before the maturity date, you may lose part of your return and/or principal. The amount payable to you depends on the market value of the underlying financial instrument that your structured deposit is linked to, which cannot be pre-determined.
You should also bear in mind that structured deposits may be subject to periodic valuation, which may not be on a daily basis. In short, you are unlikely to get all of your money back.
Finally, one word of caution with these products; the word ‘guaranteed’ in these product names or terms and conditions may not mean what you think. You are guaranteed to get the returns offered only if the index or stocks performs as required in the product’s terms and conditions. Your capital is guaranteed only if the company providing the guarantee can meet its obligations and does not default. Even when your capital is guaranteed fees and charges may mean you get back less than you put in.
The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.
