The compensation deal was struck yesterday between MGAM and Imro, the investment regulator headed by Philip Thorpe, who has taken a firm line.
The compensation comes four months after dealings in the three once-top performing funds were suspended for three days in early September when irregularities were discovered in funds run by Peter Young, the fund manager who is under investigation by the Serious Fraud Office.
Robert Smith, the newly installed chief executive of MGAM, expects more than 90 per cent of the 90,000 or so investors in the fund to be entitled to compensation.
The payments, in either cash or new units, will be based on the difference between the investment return from the Morgan Grenfell fund in which they were invested and the return provided by a specially devised index compiled from data from Micropal, the fund measurement firm.
Compensation will be calculated from the period between 1 August 1995, when the first evidence of wrong-doing was uncovered, and 5 September 1996, when trading in the funds resumed.
Deutsche will also pay interest on the compensation payments at a rate of 6 per cent per annum for sterling and dollar-denominated investments and 4 per cent for German mark-denominated investments.
"Imro believes that this agreement is a fair and equitable one which safeguards the interests of investors," Daniel Waters, director of monitoring and enforcement at Imro said yesterday.
"We are pleased that these discussions have been brought to a speedy conclusion. It is in the interests of investors that compensation will be paid without undue delay," he added.
Investors in the three funds - European Growth, European Capital Growth and Europa - will receive letters from MGAM in the next few days.
Next month, investors will receive a record of their transactions and further details of the compensation package although no one will receive any compensation payment until next April.
Compensation will be at least equal to the value of original investments made in the funds. However, no compensation will be paid to investors whose return over the period is positive and higher than the index against which performance is being measured.
"That's very fair," said Roddy Kohn, of Bristol-based financial advisers Kohn Cougan. "I don't think investors should regard this as a bum steer."
The index against which European Growth Trust and European Capital Growth Trust are being measured provided an investment return of 17 per cent over the period. That is the minimum return each investor will receive.
In contrast, European Capital Growth Fund gave an 11 per cent return while the European Growth Fund produced just a 2 per cent return.
Europa, another of the funds affected which was run by Steward Armer, who has been suspended from work, managed a 31 per cent return.