Want to make money, or just not lose it?

Most investors think their key objective is to generate the highest possible returns: in fact, many of us actually want to make sure we do not lose money. Capital protection is what we really want. As the gyrations in share prices of the past few months - not to mention the stock market crash at the start of the decade - made clear, that is not easy to achieve if you are invested in equity funds: a falling market tends to take all shares with it, regardless of their prospects, management or profit margins.

Even in the cautious managed sector, where managers have a spread of investments aimed at reducing risk, all but nine out of 74 funds lost money over the three months to the end of July; in the bigger UK All Companies sector, only six out of 335 were in the same position.

Of course, all but a handful of these funds are still showing gains over the past year, reflecting the fact that the FTSE 100 is still up about 10 per cent over 12 months despite the recent falls. But with growing concerns about commodity prices fuelling inflation, rising interest rates here and in the US, Middle East tension and terrorist threats, few pundits are betting that stock markets will resume their bull run quickly - and pessimists think the current turbulence could get worse before it gets better.

Small wonder, then, that there is growing interest in products offering to protect investors' capital and the prospect of some investment growth. The simplest of these are 'structured products', which guarantee that investors will get at least their initial deposit back along with a share of the increase in the stock market should share prices rise. These use derivatives, usually in the form of a call option on the FTSE 100, to harness any stock market gains, while putting the bulk of the money on deposit.

The longest-established players - and the only firm that offers these products as unit trusts and Oeics - is Close Fund Management. It offers two Escalator products, one guaranteeing all investors' capital, the other safeguarding 95 per cent. Marc Gordon, the firm's managing director, sees the 100 per cent Escalator as an alternative to a deposit account - its return is about 1 per cent higher than cash - while the 95 per cent fund is an alternative to with-profits.

As would be expected, neither product did as well as the stock market during the three raging bull years. According to figures produced by Bestinvest, the 100 per cent fund had a total return of 4.6 per cent last year, and 14.5 per cent over the past three, compared with 12.5 per cent and 51.6 per cent respectively for the FTSE 100. But, as Gordon points out, it has produced a return for investors every quarter for the 10 years it has been in existence.

Close's 95 per cent fund did better, with 6.3 per cent and 37.4 per cent returns over one and three years, but it really shows its attractions over five years, which includes the stock market crash: with a return of 36 per cent compared with 26.8 per cent for the FTSE 100. And, while it did fall during that crash, as the chart shows, the decline was far less than for the FTSE 100 or for the average balanced fund. Gordon estimates that it is around a third as volatile as the market as a whole.

Close's funds can be bought and sold any time, just like any other unit trust or Oeic. Most other structured products have a fixed life and, while investors can take their money out during the period, that will usually affect the returns. The market leader for these products is Barclays Capital, whose Five Year Protected FTSE plan offers investors 112 per cent of any increase in the stock market over that period as well as a guarantee that they will at least get their money back.

Like the Close products, one key attraction is that profits are subject to capital gains rather than income tax, so anyone who has not used their £8,800 capital allowance will escape tax completely, making the returns potentially more attractive than bank and building society deposits. Many of the other products available, such as those launched regularly by National Savings or the JP Morgan FTSE Simple Growth plan, which gives 125 per cent of the gain in the index over six years, are structured as deposit accounts and so are subject to income tax.

Bestinvest's Justin Modray says that makes them less attractive to taxpayers unless they are held within an Isa. But Modray thinks all these products suffer because they do not pay the dividends which make up a substantial part of the return on equities. 'Bear in mind that FTSE 100 dividends could easily add between 15 and 20 per cent to investment returns over a five-year period. Structured products are usually hard pushed to compete,' he says. 'For example, even with a 120 per cent participation rate [guaranteed return] the Index would have to double over five years for the enhanced participation to compensate for lack of dividends versus a tracker fund. The cost of protection is therefore likely [to be] underperformance versus a tracker in rising or flat markets.'

But these products may be suitable for those who think that the stock market could fall further from here and want to protect their investments from that - the Close funds will be most suitable as they are easy to buy and sell and have no fixed holding period. They could also be used as a core holding in a portfolio alongside riskier investments like direct equities or equity funds to provide the potential for higher gains. Next week, I will consider other products that aim to protect capital including absolute return and target returns funds.

A face to trust

The property industry wants you to get to know Reita. She has been created to give a friendly face to Reits, or real estate investment trusts, which are to be launched in January and are intended to give investors an easier, and more tax-efficient, way of investing in property.

Many of our largest property companies, including British Land, Hammerson and Land Securities, intend to convert to Reits, while property fund managers are also expected to launch them. In preparation, these organisations are backing a promotional campaign organised by the British Property Federation aimed at educating private investors and financial advisers about their benefits, with the aim of stimulating demand.

They do have attractions. Unlike property companies, gains on properties held in a Reit will not be subject to corporation tax so they will end the problem of double taxation where both the company and the investor suffered a tax charge. And unlike property unit trusts, they will not need to hold a substantial amount of their investments in cash in case investors want to sell units, as there will be a fixed number of Reit shares available to trade.

· Visit reita.org for details.