Savings rates, by contrast, are only just beating inflation as Bank of England base rates have fallen to all-time lows and returns from with- profits policies are also on the slide.
But despite this, financial advisers are highly sceptical of protected funds, arguing many of the people who have invested in them would have been much better off with non-protected funds.
Research conducted by Standard and Poors Micropal shows investors in 12 popular protected funds are losing out badly compared to those willing to accept a little more risk.
Comparing their performance to similar funds investing in similar areas over one year, they are close to the bottom of league tables. The three- year performance is better, but not by much.
Protected funds can be unit trusts, Open Ended Investment Companies (Oeics), offshore funds available as part of tax-efficient offshore bonds, or available as part of a pension plan. Some, though not all, can be held as Individual Savings Accounts (ISAs).
They come in two main types. Protected equity funds are similar to traditional unit trust or Oeic funds. They invest in shares or bonds but unlike their non-protected counterparts, the unit price in the fund cannot fall below a certain level, the protected price.
The level of protection is typically between 95 and 100 per cent. The protection is achieved by buying financial instruments called derivatives, which effectively provide insurance if the market falls. The protected period usually works over 12 months and units can be encashed at any time. If the market rises strongly the protected price can sometimes be increased.
Quarterly rolling funds offer a protected period of three months. At the end of this period the minimum price is reset but funds invested in them can not be accessed over the protected period without risking the guarantee.
The majority of the investment is held in cash, to provide the protection. In this type of fund the link to the stockmarket comes from using a different type of derivative. These types of funds cannot be placed in ISAs because of their predominantly cash-based component.
Companies offering protected equity funds include Scottish Widows, with its UK Sheltered Growth fund and Edinburgh Fund Managers, with its Safety First fund. They can be accessed through an ISA and either track a stockmarket index or be "actively managed", aiming to beat an index.
Examples of quarterly rolling funds are the Close UK Escalator 100 and 95 funds and NatWest's Safeguard fund. They usually track a stockmarket index such as the FTSE 100.
Both types are suffering disadvantages, ironically caused by the very economic conditions which have hit savings and with-profits returns and made them popular.
Low rates mean quarterly rolling funds have to keep more money on deposit leaving less to be used to purchase the stockmarket link, while current choppy markets and uncertainty about how they will perform mean the derivatives protected equity funds buy have become more expensive, hitting performance. Some protected products, such as those operated by Legal & General and Barclays B2, have closed to new business as a result.
Nonetheless the amount of cash invested in protected funds has shot up over the last five years. In 1994 the Association of Unit Trusts and Investment Funds identified one fund, which had pounds 18.6m invested.
Independent financial adviser Amanda Davidson, a partner with Holden Meehan, says: "These funds can be useful but you have to understand what you are giving up. You can miss out on a lot of growth. They are really for cautious investors, or for a cautious part of a portfolio. And capital is not totally protected. Even in 100 per cent protected funds you could still lose out on inflation."Reuse content