Where's the low-risk road to recovery for me?

One investor who lost half the money she had saved in her Isas and Peps wants to know how she can safely invest her cash, says Tony Lyons. Despite hideous value drops, for the long-term saver, portfolios balanced with equities remain the best bet

Fed up with the performance of the equities in her portfolio of individual savings accounts (Isas) and their forerunner, personal equity plans (Peps), Bernadette Jamieson, a retired off-licence manager from West Derbyshire, has gone for safety-first this year. "I had listened to friends and advisers and invested in stocks and shares through Lloyds TSB and Scottish Widows," she says. "I have been very unhappy with their performance. I lost about half the money I invested."

Now that she and her husband are no longer working, her attitude to saving has changed. She can no longer afford to risk capital, so she has started a cash Isa with Smile, the Co-op Bank's internet arm. "It has a decent promotion," Mrs Jamieson says. "I like the bank's ethical attitude, and I know my money will be safe. It was such a shock to see how my past investments have fallen, something I can ill afford."

Mrs Jamieson has invested in the tax-free deposit account that pays 3.5 per cent interest. She will soon open a Smile current account, so her Isa will pay her 4 per cent. "My experience of investment in equities over the years has not been happy," she says. "When prices started to fall, I listened to advisers who recommended leaving my funds in the stock market. I did and saw them shrink more. Now I can't afford to take risks. I am wiser and I need to make sure my money is safe."

Mrs Jamieson is part of a growing trend towards risk-free and low-risk investments against a background of stock market uncertainty. The decline in equity values has made investors nervous about putting money into the market.

Even so, it still makes sense to use the Isa tax advantages. All gains and income from the investment will be tax-free, at least until next April when the income is to be taxed unless the Chancellor, Gordon Brown, decrees otherwise. And there are plenty of ways to reduce risk.

"Investors should not be put off making maximum use of cash Isas," says Philippa Gee, of Torquil Clark, the Wolverhampton-based independent financial adviser. Up to £3,000 can be invested this way, free of risk to your capital, but you cannot invest in a full £7,000 equity Isa in the same tax year. But although interest rates have fallen, cash Isas from the likes of Northern Rock, Safeway and some of the smaller building societies still pay more than 4 per cent. If you have £1,000 or more to invest and are happy with 30 days or more notice of withdrawal, you can get up to 4.5 per cent.

"Even if you need to take money out of your Isa, which cannot be replaced, it still makes sense to invest as much as you can up to the maximum," Ms Gee adds. "And remember, from 6 April, the start of the new tax year, you can put up to another £3,000 in."

It is possible to make use of a maxi-Isa, where up to £7,000 can be invested, and keep your money on deposit and earn interest tax-free. The Inland Revenue allows this if you intend to put the money into the stock market. No time limits are laid down on how long you can wait before you do so.

Some IFAs, such as Hargreaves Lansdown and Kohn Cougar, who have their own Isa management operation, offer this. Their rate of interest, typically 3 per cent, is far from generous, but it does allow investors to take full advantage of the tax-free investment and delay buying equities until they are ready.

To most investors, gilt and corporate bond funds are seen as low risk. After all, apart from the junk bond sector, which invests in the loan stock of second- and third-line companies, the thinking is that your money earns a decent yield and is safe. But maybe not.

"Investors should be cautious," Roddy Kohn, of Kohn Cougar, says. "These funds do have risks to capital. When interest rates start to rise, which they will, their yields will go up but their buying and selling price will correspondingly fall."

Most IFAs say if a customer wants low risk, far better to have a balanced portfolio. Ms Gee says: "Why not look at a distribution fund such as that recently launched by New Star? The portfolio is split 60 per cent in bonds, 40 per cent in equities, with James Gledhill looking after the former, Toby Thompson looking after the latter and Theo Zamek pulling the strings. All three have excellent fund management pedigrees."

A distribution fund, and there are others offered by groups such as Jupiter, Threadneedle and Prudential, provides a low-risk halfway house, relying as they do on a combination of income and growth. Generally, they have yields in excess of 3 per cent, providing a worthwhile tax-free dividend.

It is also possible to invest in equities through an Isa without risk to capital, providing a home to those wanting very low risk of outright loss. This can be done through a protected, or structured fund. HSBC, for example, offers a six-year Capital Protected Growth Plan. Mr Kohn says: "Linked to the performance of the FTSE 100, this releases your money at certain points if the stock market performs well. The Isa will return your capital plus growth if the index rises at least 21 per cent on the third anniversary and 55 per cent on the fifth anniversary. Otherwise, it will mature after six years and investors will the get their capital back and whatever growth there has been."

But it is not totally risk-free. There are no guarantees of a full return if one of the providers of the financial instruments used to protect capital goes bust. And there is no income. The plan relies on increases in the price of the FTSE stocks.

In these troubled days, many shrewd fund managers believe this stock market offers excellent value. If you are young enough to take a long-term view, at least five or 10 years, a well-run equity fund where dividends are reinvested could be just as low-risk as anything else. And it could be more profitable.