I can't keep track of my FTSE linked account

Q I invested my savings in a FTSE tracker account on the advice of a banking advisor. I have since heard that these accounts are risky because the stock market is controlled by only a few companies, and if those companies crash so will the stock market. Please could you advise me as to the pitfalls of this type of account? I know nothing about the stock market and interest rates.

AB

A Tracker accounts vary. As you were recommended it by a banking adviser, l suspect you have a deposit account linked to the performance of the FTSE l00 index over a period of time. The most popular type is where a return of capital is guaranteed at the end of the specified period, normally five years.

Instead of receiving interest on your money you get a percentage of any rise in the value of the FTSE index over the period. The "gamble" is whether the return you receive, after having locked your money away for the specified period, is greater than the amount you would have earned from simply re-investing on a compound basis the interest earned.

It is an expensive way of gaining exposure to the London share market with little or no risk. Protecting your capital against loss doesn't come cheap. Tracker funds, which are collective investment vehicles like unit trusts, are totally different. In that case the fund invests in shares, or options, of companies making up the index thereby seeking to track the ups and downs in the index as closely as possible.

That is fine when the underlying trend in the market is upwards, but it is a very different matter when there is a sustained downturn. Trackers cannot protect themselves by going into cash when the going gets rough. An additional problem is that the FTSE 100 index is particularly volatile because it is dominated by a relatively small number of giant groups, whose share prices can and do fluctuate wildly. Marconi and Vodaphone are just two examples. Nevertheless the cheaper charges do help tracker funds fare quite well in comparison with most actively managed funds, especially those that concentrated on high technology stocks.