Savers flock to bonds that ride the downturns: Distribution funds have found favour with investors who want income and growth but not a lot of risk. Nic Cicutti reports

THE SEARCH by investors for respectable income plus good capital growth - all without risking one's shirt - has led to the launch of a wide variety of savings products.

Among the most popular in the past year have been the distribution funds available from several insurance companies, including Sun Life, Prudential, Allied Dunbar, Skandia, Scottish Provident and Axa Equity & Law. This week AIG Life, a subsidiary of American Life in the US, launched its own bond to the public.

Distribution bonds are a form of unit-linked savings, with a conservative investment strategy. Funds are spread across gilts and other fixed-interest investments.

The underlying fund is divided into units of equal value, which rise and fall according to investment conditions.

Income from bonds, usually paid on two distribution dates each year, is free of capital gains and income tax at the basic rate.

The popularity of these funds is growing. Last year they attracted pounds 500m, most of it in the last six months, and they are currently drawing pounds 40m each week.

Income payouts announced last month by Prudential, Skandia and Axa Equity and Law are between 5 and 6.4 per cent. The underlying value of funds also grew by between 10 and 12 per cent.

The company all others want to emulate is Sun Life, whose fund was set up in 1979. It now has about pounds 2bn under management and more than 150,000 investors - a third of whom joined last year.

Jim Stride, the fund's manager, said: 'Our customers are generally looking for safety and security. They do not like taking unnecessary risks with their money. That is why our asset mix is a relatively safe option.'

The fund currently invests about 40 per cent in UK equities, a further 40 per cent in fixed-interest stocks and the remainder in cash or other convertibles.

It does not invest either in property or overseas equities, claiming this policy makes the fund more secure. Mr Stride said it has ensured that the fund can ride relatively unscathed through most market downturns, whether on the scale of the October 1987 crash or the dip after the Iraqi invasion of Kuwait in August 1990.

Peter Helm and his wife Margaret invested pounds 30,000 in Sun Life's bond in February. The money was part of Mr Helm's severance package when he left Zeneca, formerly part of ICI, last year.

Mr Helm, 57, said: 'After leaving Zeneca I carried out research to find out what type of investment would suit our needs.

'I contacted Towry Law, a firm of financial advisers, at their Windsor office. Sun Life's bond seemed to make sense.'

The money is invested in the insurance company's deferred bond, which means no income is taken now and the capital is allowed to grow.

Mr Helm, from Stroud in Gloucestershire, is now a part-time travel consultant, while his wife runs a small bed-and-breakfast business. The couple do not need income at present.

'I was looking for a little bit of adventure, something that was going to give me a better return than a building society or National Savings could,' said Mr Helm. 'I feel we have made the right decision for us.'

Not all financial advisers are convinced about the effectiveness of distribution funds.

Roddy Kohn, at Kohn Cougar in Bristol, said: 'Firstly, it should be remembered that nothing is completely risk-free.

'Secondly, the particular mix of distribution funds is one which can just as easily be set up by any adviser through the right portfolio of investment trusts or PEPs, which may have lower charges.

'Finally, if one wants to get full tax benefits from an investment, they are better off with a PEP. With a distribution fund, the income may be tax-free but there is still underlying life assurance company taxation to pay.

'Investors should be looking to use their pounds 9,000-a-year tax allowance through personal equity plans before even considering these bonds.'

----------------------------------------------------------------- DISTRIBUTION BONDS ----------------------------------------------------------------- Company and fund Net at basic Distribution & higher rate of income Allied Dunbar Dist Bond 5.0 March and 4.8 September AXA Equity & Law 5.0E February 4.8 and August M&G High Yield 4.0 March, June 3.8 Sept, Dec M&G Managed Income 3.8 Monthly 3.6 NM/Friends Prov Extra 4.3 Monthly 3.9 NM/Friends Prov Income 3.8 March 2.8 September Prudential Prudence 5.0 February 5.0 August Royal Life Option Income 5.2 May and 4.8 November** Save & Prosper Managed 4.8 Monthly 4.4 Scot Prov Prolific Equity 3.4 Jan, April 3.4 July, Oct Scot Prov Prol High Yield 5.4 March, June 5.25 Sept, Dec Scot Prov Prolific Managed 3.9 Feb, May 3.8 Aug, Nov Skandia (Schroder) 5.0E February 5.6 August Sun Life 4.2 May 4.3 November ** Series A units; Series B units have distributions in February and August. ----------------------------------------------------------------- Source: David M Aaron Partnership (0908 281544) -----------------------------------------------------------------

(Photograph omitted)