Funds with a Floor
'May you live in interesting times'

This phrase, which is allegedly a Chinese curse, certainly sums up how many investors feel about the second half of 2007. Both the US and UK stock markets went on a rollercoaster ride once the sub-prime crisis hit in mid-July. Hints of interest rate cuts would spur the markets into sharp upward movements, while stories about crumbling banks had the opposite effect.

If the turbulence put you off investing, you are not alone. The Investment Management Association reported that net UK domiciled fund sales fell by over three-quarters in October 2007 against the previous year. £31m more was withdrawn from existing individual savings accounts than was invested in new plans.

This caution is understandable, but postponing investment until commentators are more optimistic may not be the best decision. It can sometimes make sense to invest when the investment outlook appears gloomy. Of course, much depends on the extent to which you can tolerate the risk of your investments falling in value.

Fortunately you do not need to have nerves of steel to make such investment choices. There is now a range of investments that are designed to give you exposure to the upside of share-based investment performance while protecting you from the potential downside. These include:
 
• Fixed term plans These plans run for a fixed period, typically five years, and give you capital protection with a return linked to stock market index performance or possibly fund performance. They have a wide variety of structures, but most are subject to capital gains tax rules, so the maximum tax you would pay on profits under next year's proposed rules is 18%.

• Rolling protection plans These plans protect your capital from loss beyond a pre-determined threshold (generally between 0% and 5%) each quarter or each year.

• Constant protection plans These are one of the more recent innovations and offer you investment in a range of funds that have a minimum 'floor price', typically 80% of the highest-ever level.

However, protection generally comes at a cost and the more you protect against potential loss, the less you can benefit from any upward investment performance. Both the structure of the plans and their charging structure can have an impact on performance. Past performance is not a reliable indicator of future performance and the value of investments and the income from them can go down as well as up. Some of these investments involve penalties on early redemption. Investing in equity-based funds should normally be regarded as a long-term investment and fit in with your overall attitude to risk and financial circumstances.