Combined investment products 

Structured deposits (eg share deposits)

Structured deposits are fixed term deposits where the return generally consists of a fixed interest rate and a potential additional interest. The additional interest is paid if the predetermined underlying performs well during the deposit period. The underlying can be for example listed shares.

An example of a structured deposit is a fixed term deposit tied to three listed shares, which offers a fixed interest rate and a potential additional interest rate. The potential additional interest is based on the performance of the underlying shares and is paid if the value of each of the underlying is at least as high at maturity as at the beginning of the deposit term. The additional interest rate can be for example 9% on the lifetime of the deposit – the annual percentage rate of charge is below this. If the value of even one the three shares is less at maturity than at the beginning of the deposit term, no additional interest is paid on the deposit; only the fixed interest rate is paid.

Risks

Returns on a structured deposit are dependent on the performance of the underlying instruments over the lifetime of the deposit: if additional interest is paid, returns can be higher compared to other deposit alternatives, but if the additional interest is not paid, returns are usually below those of typical fixed term deposits. If you are considering to invest in structured deposits, you should familiarise yourself with the underlying instruments very carefully.

The principal invested is repaid in full at maturity. Deposits made at a deposit bank involve a low risk. Deposit banks are members of the Deposit Guarantee Fund which compensates for deposited funds to up to EUR 100,000 in case of a bank’s insolvency. The terms and conditions of the deposit indicate whether the additional interest is covered by the fund.

Deposits made at branches of foreign deposit banks are subject to the cover scheme offered in the bank’s home state, and the terms and conditions pertaining to such schemes should always be checked separately before making a deposit.

For further information on deposit guarantee, see the link on the right of the page.

If the terms and conditions of a structured deposit include a possibility to redeem the deposit before maturity, the bank will usually charge a handling and contract termination costs.

Fixed term deposits and investments in funds or index-linked bonds

Banks have introduced combined investment products in the market. These products combine a fixed term deposit eg with an investment in a fund or an index-linked bond. The idea is that, besides the deposit, the customer also invests funds in some other investment product and the interest rate paid on the fixed term deposit is then higher than normal. The maturity of a fixed term deposit varies from few months to several years, and the interest paid on it is higher than the typical deposit rate. The interest rate varies depending on the deposited sum and the maturity of the deposit.

The return paid on other investment, eg fund share, depends on the market situation. For instance, returns on fund shares are dependent on the fund’s investment policy and investment targets. The bank usually levies fees and commissions on fund subscriptions, which are indicated in the service price list.

For further information on investing in funds and index-linked bonds, see the links on the right of the page.

Risks

When it comes to investing in funds and index-linked bonds, it should be borne in mind that the value of the investment may rise and fall and that past performance is no guarantee of future results. If the fund’s value falls, the investor may lose the invested principal. For further information on the risks of various investment products, see the links on the right of the page.

A fixed term deposit cannot generally be withdrawn or terminated before maturity. However, it may be possible that the investor can change eg fund shares, but in such a case the investor may lose the interest paid on the fixed term deposit. On the other hand, if the investor wishes to sell the index-linked bond before maturity, the selling price is determined on the basis of the market price at sale date and may also be lower than the principal invested at the purchase date.

The deposit guarantee covers the fixed term deposit of a combined investment product. For further information on deposit guarantee, see the links on the right of the page.

24 October 2011