These defensive growth funds are not the same as guaranteed funds which offer the opportunity for you to share in market gains, or your money back after a set period of time.
The problem with guaranteed funds is that you often only receive a percentage of the market's growth during this period, and the total return is usually capped and may be considerably lower than the markets' full growth during the period. You also do not receive any dividends from the fund while your investment remains in place.
With a defensive unit trust growth fund, there is a greater chance of sharing in the markets' full growth, but your money is also protected against the full effects of any potential fall in the market.
The two main types of defensive growth funds are "cash and call" funds and "share and put" funds.
With cash and call funds, a floor price is set every three months which the value of the units can not fall below. Typically the floor price is 97 per cent of the unit price. If the market rises during the quarter, investors will share in the gains as the next quarterly lock-in price will be based on the higher value of units.
But if the market falls during the quarter, investors are assured of getting back 97 per cent of their original capital. These types of funds are offered by the likes of AIB Govett and Close Brothers.
Cash and call funds place the bulk of their money on deposit and use the rest of the money to buy a "call-option", which is a bet on the stockmarket going up. If the stockmarket rises, the option pays out and the fund shares in the stockmarket's advance. Because only a small amount of the fund's money goes into equities, these funds are not PEPable.
The other type of defensive growth fund is a share and put fund. These funds typically invest 95 per cent of your money in the UK stockmarket and use the other 5 per cent to buy a "put option", which effectively is insurance protecting 95 per cent to 100 per cent of your money against a market fall. AIB Govett, Scottish Widows, Morgan Grenfell and Edinburgh Fund Managers offer this fund which is PEPable.
Defensive growth funds do not guarantee your money back in full after a set period of time as guaranteed funds do, nor are they simple to understand.
You will, moreover, not get the full benefit of any growth in the stockmarket as some of the money you invest is used to buy protection.
However, if you want the opportunity for your money to earn more than it would do sitting in a building society account, these funds can be ideal as they offer exposure to the stockmarket with some security built in.
While you will not get the full benefits of any growth in the stockmarket, you are likely to get nearer the full return than you would with a guaranteed fund. You also can buy and sell these unit trusts when you choose, and you earn dividends.
`The Independent' has produced a free last-minute `Guide to PEPs'. The 28-page guide, by Nic Cicutti, the personal finance editor, analyses if PEP investments might suit your needs, how to compare PEPs, what the tax benefits are and what their rules are. If you are considering a last-minute PEP, this guide, sponsored by Scottish Widows Fund Management, is for you. Call 0345 678910 for your free copy
WHAT THE EXPERTS SAY
SO WHICH funds do the experts like? We asked three independent financial advisers for their favourites.
Brian Dennehy of Dennehy, Weller & Co in Kent, favours the Morgan Grenfell All-Weather Equity fund and the Scottish Widows Safety Plus fund, both of which are "share and put" funds.
"With these funds the manager invests in the FTSE 100 index shares they like and leaves out those which they think will underperform.
"Also, `share and put' funds will typically ensure that the bid price of your units at the beginning of a 12-month period cannot drop by more than 5 or 10 per cent a year. With the quarterly `cash and call' funds you typically risk losing 3 per cent every quarter, so this clearly is more risky," he says.
Graham Glew of IMG Financial Management in Nottingham, also likes Morgan Grenfell's All Weather Equity fund.
"The fund aims to lock in profits when it has risen by 10 per cent from its protective floor. On the downside the aim is to limit falls to 10 per cent in any one year. This was put to the test during the third quarter of 1998, when the stockmarket fell by more than 24 per cent but the All Weather Equity fund fell just 6.6 per cent."
For investors who want to know more precisely the degree of risk, Mr Glew favours the Govett UK Safeguard fund which is a "cash and call" fund which limits your potential losses to 2 per cent in any one quarter.
Vivienne Starkey of Haddock Porter Williams in London, prefers Govett UK Equity Safeguard fund and Edinburgh Fund Managers Safety First.
"These funds are a halfway house between building society accounts and equity investments. The cautious investor can dip into the equity market without losing too much sleep," she says.