Can you have thrills without spills?

So you want a risk-free ride on the stock market? Here and on pages 14 to 15 we look at the products that promise a safety net
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The Independent Online
The Words "guaranteed" and "protected" are becoming the financial fashion of 1996.

Following the successful marketing of a range of guaranteed stock market bonds over recent years, the financial services industry is shifting its attention to guaranteed unit trusts and personal equity plans (PEPs).

But, as with all investment fashions, one question must be asked. Is it driven by sensible investment criteria or marketing considerations? There is a strong suspicion that the latter is the case with guarantees.

The word "guaranteed" in marketing literature can have a powerful effect on cautious investors. Of course, marketable ideas may also be based on sound principles. But there is an inherent contradiction here: it is in the nature of shares and unit trusts that you take a risk.

The risk is that your investment may not perform as well as others. If the worst comes to the worst, you could end up with less money than you invested, or even lose the lot. On the other hand, the greater the risk you are prepared to take, the greater the potential gain.

Any stock market investment that is guaranteed or protected carries a lower risk, and therefore a lower potential reward. Conversely, with stock markets at record highs, there may be a case for choosing a fund that protects you against market falls.

Anyone who believes a nosedive in share prices is imminent would sensibly steer clear of markets and stick with the building society. But the lure of the guarantee may be hard to resist.

That, at least, is the hope of stock market fund managers. Back in May NatWest launched its Safeguard unit trust, which consists of a portfolio of both UK and international shares and bonds. In this case, the capital you invest is "protected": if the market suffers a severe downturn, there is a floor price of 95 per cent of the selling price of units set on 1 June each year (and reset at a higher level if there is a 10 per cent rise in unit prices before the next 1 June).

Unlike five-year guaranteed stock market bonds, you can cash in your money when you want. And the trust qualifies for inclusion under the tax- efficient umbrella of a PEP. But there is no absolute guarantee that the floor price will always be maintained in the most severe market conditions. And the guarantee has to be paid for through the use of financial instruments known as options. While the fund may successfully limit losses, it will not necessarily capture all the growth in a strongly rising market.

Now Barclays is joining the fray with its Guaranteed PEP, in which you have to invest by 8 November. Your money goes into a unit trust which aims to track the FT-SE 100 index. The guarantee lasts for five years and at the end of this you will, at the least, get your original investment back. The cost of the guarantee is 1.2 per cent of the money you invest deducted each year, and there are exit charges on early withdrawals of up to 5 per cent. Marks and Spencer has a similar product - its Guaranteed Capital Investment Plan.

Meanwhile, at HSBC, there is a 17 October deadline for PEP Plus 11. This is a five-year growth PEP "designed to offer all the capital growth in the FT-SE 100 plus an additional bonus of 25 per cent of the growth achieved with the added security of a 100 per cent return of capital if the market falls".

Set against these new entrants, Legal & General is something of an old- stager. Its PEP-able unit trust was launched in 1993 and aims to track the FT-SE 100. For a cost of 4 per cent of your initial investment, you get a guarantee of your money back on the fifth anniversary. But you can cash in without penalty at any time.

Guarantees can bring peace of mind, but in reality the markets will have to perform pretty badly if they are ever to come into effect. If you are interested in any of the funds, do check on all the details and charges.

q Contacts: Barclays 0800 551177; HSBC 0800 262115; Legal & General 0171 528 6793; Marks and Spencer 0800 363451; NatWest 0800 854369.