This chapter takes the building blocks from the introduction to structured funds and applies them to real designs: capital guaranteed funds, bond-plus-call funds designed to repay principal, CPPI funds, covered-call, put-writing and autocallable income funds, swap-based synthetic index funds, leveraged and inverse funds and Daily Leverage Certificates, and hedged or overlay strategies. For each one the exam expects you to work out the payoff in rising, falling, flat and choppy markets, name the risk that is really being carried, and match the design to an investor's view, time frame, liquidity needs and capacity for loss. Most questions are short calculations or suitability scenarios, so practise the arithmetic until it is automatic.
8 sections·~7 min read
✓Checked against the SCI M8A syllabus chapter 5 (checked 13 Sep 2026); MAS Code on Collective Investment Schemes, last revised and effective 2 July 2026 (Appendix 1 paras 5.1-5.16 and 8.6, Appendix 4, Appendix 5); Securities and Futures Act 2001 s.309C and Financial Advisers Act 2001 s.36 (current versions as at 13 Sep 2026); MAS Notice SFA 04-N12 (last updated 4 Jan 2019); SGX Daily Leverage Certificates product guide (information updated Nov 2020); MoneySense structured notes guide (last updated 2 Jul 2026). Unofficial prep, not endorsed by MAS or SCI.
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Must-know for the exam
✓Capital guaranteed fund (Code on CIS App 4): unconditional, first-demand guarantee of not less than 100% of capital, or 100% less front-end loads, or applying only on set dates, if prominently disclosed.
✓Guarantor must be rated at least AA/Aa if a financial institution (AAA/Aaa otherwise). A downgrade that stays at least A needs no action; below A, replace within six months with the same level of guarantee.
✓A guarantee pays only on the guarantee date and only covers a shortfall. Earlier redemptions are at NAV. A foreign-currency guarantee does not cover exchange-rate losses.
✓A fund that relies solely or largely on its own bonds and options is not capital guaranteed. SFA s.309C bans 'capital protected' and 'principal protected' labels; use wording such as 'designed to repay principal at maturity'.
✓Bond-plus-call option budget = 100 - zero-coupon bond price. Participation = option budget / call cost. Higher yields, caps, averaging and price indices raise participation.
✓CPPI exposure = multiplier x (fund value - floor). It beats a fixed mix in steady trends, lags in whipsaw markets, and a gap bigger than 1 / multiplier breaks the floor.
✓Covered call: return capped at (strike - start + premium); downside cushioned only by the premium. Cash plus sold puts gives a similar payoff at the same strike (put-call parity).
✓Knock-in barrier breached: principal is repaid times final / initial level, so the loss runs from the initial level, not from the barrier.
✓Synthetic fund default loss = swap value owed to the fund minus what collateral realises. Unfunded funds are left holding a substitute basket that may not track the index.
✓Code on CIS App 1 paras 5.1-5.5: OTC counterparty exposure up to 10% of NAV for an eligible financial institution (5% otherwise); para 5.16 exempts centrally cleared exchange-traded derivatives.
✓Daily leveraged and inverse products compound daily: more than leverage x the period return in steady trends, less in choppy markets.
✓SGX DLCs: issued by financial institutions, daily leverage up to 7x long or short, no margin, loss limited to the amount invested, airbag slows losses; buyers need a Customer Account Review (MAS Notice SFA 04-N12).
✓Protective put: floor = strike - start - premium. Collar: floor at the put strike, cap at the call strike, adjusted for any net premium.
✓FAA s.36: a recommendation needs a reasonable basis, having regard to the client's objectives, financial situation and particular needs.
Capital guaranteed funds with a bank guarantor
•A capital guaranteed fund meets Code on CIS Appendix 4 (Code last revised 2 July 2026). The guarantee is a written agreement between the guarantor and the trustee. It must be unconditional, first-demand, enforceable in Singapore and cover not less than 100% of capital. Two variations are allowed with prominent prospectus disclosure: 100% of capital less front-end loads, and a guarantee that applies only on set dates or after a set period.
•Falling market at maturity: you receive the guaranteed amount. The index-linked bonus pays nothing; participation never applies to falls.
•Rising market: guaranteed amount plus the bonus. Example: S$50,000 gross, 3% load, 70% of a 20% rise on the guaranteed amount: S$48,500 + 14% x S$48,500 = S$55,290.
•Flat market: you get the guaranteed amount only. With a 2% load on S$10,000 that is S$9,800, a nominal loss of S$200.
•Surplus at maturity: if the fund's assets exceed the guaranteed amount, the guarantor pays nothing. It only tops up a shortfall.
•Early redemption: paid at NAV. A fund worth S$0.91 per unit pays S$18,200 on 20,000 units, with no claim on the guarantee.
•NAV can sit below capital during the term: the bonds are marked to market, so rising yields cut NAV even with a flat index.
•The guarantor must be rated at least AA (Fitch or S&P) or Aa (Moody's) if it is a financial institution, and AAA or Aaa otherwise. If its rating falls but stays at least A, no action is needed and the guarantee stays in force. Below A or unrated, the manager must find a replacement giving the same level of guarantee within six months. Even without action, a downgrade raises the chance the one guarantor cannot pay.
•The guarantee fee comes out of the fund, so participation is usually lower than in an otherwise identical design without a guarantor. Appendix 4 sets no participation cap.
•A US-dollar guarantee pays US dollars: US$10,000 bought for S$13,500 at S$1.35 returns S$12,150 at S$1.215. With 50% participation, the index must rise 30% over five years to match a deposit paying 3% a year simple interest.
•Trap: assuming a guarantee protects early redeemers, keeps NAV above capital, or covers a gross subscription when it is stated net of the load.
•Takeaway: The guarantee pays the guaranteed amount, on the guarantee date, in the fund's currency, only if the guarantor can pay.
Bond-plus-call funds designed to repay principal
•This design buys a zero-coupon bond that grows to the principal at maturity and spends the rest on index calls. There is no guarantor, so Code on CIS Appendix 4 does not apply and the fund is not capital guaranteed. SFA s.309C bans 'capital protected' and 'principal protected' in the name or description; describe it as designed to repay principal at maturity.
•Participation depends on the option budget. With five-year zero-coupon yields at 4%, the bond costs 100 / 1.04^5 = 82.19, leaving 17.81. If calls cost 20 per 100 of exposure, participation is about 89%. At 2% yields the bond costs 90.57 and participation falls to about 47%.
•Participation: 90% of a 35% rise on S$20,000 = S$6,300 bonus, S$26,300 in total.
•Cap: 150% participation capped at 24%. A 20% rise would give 30%, so the cap pays 24%. The cap binds from a 16% rise (24 / 1.5).
•Cap versus no cap: 140% capped at 21% beats 100% uncapped for every rise up to 21%; above 21% the uncapped fund pays more.
•Averaging: closes of 110, 125, 130 and 95 average 115. At 80% participation the fund pays S$112, where the final close alone would pay S$100. In a steady rise to 116 with closes of 104 to 116, averaging pays 110 instead of 116.
•Ways to raise participation within the same budget: add or lower a cap, average the final level, or link to a price index that excludes dividends. Raising a cap lowers participation.
•During the term NAV is the market value of the bond plus the calls. Falling yields lift the bond, and higher volatility lifts the calls. An investor exiting when the bond is worth S$84 and the calls S$3 receives S$87.
•Who can stop repayment at maturity: bond issuers and the option counterparty. If S$10 of the S$100 bond face value defaults with 40% recovery, the fund pays S$94. If the call counterparty owes S$30 but defaults, and the trustee enforces S$20 of collateral, the fund pays S$120. An index fall alone does not reduce principal; the calls simply expire worthless.
•Trap: treating 'designed to repay principal' as a guarantee, or thinking an index fall cuts the maturity payout while overlooking issuer default.
•Takeaway: Principal comes from the bonds, upside from the calls. Credit events, not index falls, reduce principal at maturity.
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