Market funds that watch your back

A SAVINGS account paying 6 per cent interest may seem a glittering investment at the moment, but when the stock market picks up, opting for safety will mean missing out on higher returns.

One potential solution is to get into the stock market and then find a way to limit the risk to your capital. Fear of a falling FT-SE 100 index has already spawned hundreds of share investments which offer some capital protection. But look at what backs up these glossy ads; there are plenty of drawbacks and you pay a high price for a guarantee to limit your losses.

Guaranteed unit trusts offer the chance to cash in on stock market growth while protecting most of your capital from a crash. They typically guarantee 98 per cent of your capital while passing on most of the growth in one or more of the world's biggest markets.

But be careful. Many products renew the capital guarantee after three months, when the money is reinvested. That sounds good on a rising market, but on a falling market it can have devastating effects: capital invested at the start of the year can fall to 82 per cent of its value by the end. Also note that the guarantee might apply only after the investment company has taken its cut, usually in the form of a 5 per cent charge.

An alternative to these unit trusts are equity-linked Tessas. These are five-year investments which promise to return the capital invested after five years. Bristol & West, Birmingham Midshires and HSBC currently offer these deals.

Investors with a stock market-linked plan are typically promised a proportion of the growth in one or more markets - perhaps 80 per cent of the average of the FT-SE 100, Nikkei 225 and S&P 500. Interest is tax-free. You have to leave the money untouched for five years to get the benefit of an equity- linked Tessa.

With guaranteed equity bonds, the third type of "lower-risk" stock market product, investors must tuck away their money - usually for five years. In return they are promised a proportion of the growth in one or more indices, plus some capital protection. Some banks and building societies promise 100 per cent of the FT-SE's growth over five years and 100 per cent of the initial investment back.

These bonds are limited-edition offers, so you don't have much time to make up your mind. But don't rush to invest unless you can be absolutely sure you will not need the money before five years are up. The more attractive the investment looks, the greater the penalty for stopping.