Let's take a closer look at equity linked notes or ELNs.
One of the most widely issued categories of structured investment products.
ELNs are products whose returns are tied to the performance of an equity related underlying either a single stock, an equity index, or a basket of equities.
Within this broad category, there are different types of ELNs, each offering varying levels of risk and capital protection.
Some are designed to maximize upside participation while others prioritize capital preservation.
A commonly used type of ELN is a participation note or keynote.
This is a structured note that allows investors to participate in the performance of an equity related asset without directly owning.
The underlying keynotes are often used in markets where direct investment is restricted.
For example, a foreign investor unable to purchase Indian equities directly might buy a keynote that delivers the return of a basket of Indian stocks.
These products typically have no capital protection, meaning investors participate fully in both the potential gains as well as the losses of the underlying asset.
On the other hand, principle protected notes or PPNs offer full capital protection.
PPNs can also be called capital protected notes or capital guaranteed notes.
These structured notes guarantee at maturity the return of at least the investors' initial capital regardless of how the underlying asset performs.
However, this protection does not come for free.
Investors often receive reduced participation in the upside as a portion of the investment is allocated to ensuring capital protection.
