Profit without the pain

Over the last few weeks we have all seen headlines about speculation and fluctuation in the currency and stock markets. We have also seen gold hitting a new low. All this during a period of growth, low unemployment and low inflation in the industrial world.

I do not intend to elaborate the reasons for this here. However, given the economic fundamentals mentioned above, this should be a period when you could invest with confidence in the major stock markets around the world. Yet many people remain unsure. Possibly because they have been told this by 'experts' before and have seen their funds diminish over the last year.

So what should they do with their money? Place it in a bank? It should certainly be safe, but there is a price to pay with only low returns being received. Consequently, many people are placing their hard-earned funds into 'guaranteed or protected funds' which, providing the conditions laid down by the provider are met, means, at worst, they will see the return of their money at the end of a fixed period and at best they will obtain an above average return.

However, be warned, some investments labelled as guaranteed may be subject to 'some small print' which makes the return subject to the performance of one or more stock markets around the world. Some so obscure that you may never have heard of them, let alone be able to track them. This type of fund has been subject to a great deal of criticism by the regulatory bodies in the UK and cannot now use the word 'guaranteed'. Unfortunately, this restriction does not apply to funds being marketed in the Gulf.

Once this type of fund is discarded, there are other funds that do live up to their promise and can give you the return you would hope for by investing in volatile areas like technology, with part of your investment, whilst placing the rest in U.S. Treasury backed securities to provide sufficient funds to repay your investment at the end of a five-year period. This is the minimum period you would have to invest to take advantage of most of the 'guarantees' on offer.

If this time-scale does not scare you off, there is another type of investment called a 'with profit' bond which is proving very popular with people in this region, especially as it really does give a guaranteed return each year.

This type of investment is provided by some of the strongest insurance companies in Europe and is available in dollars, pounds and euros. The return is determined by the denominated currency and the amount invested, as part of the funds are placed in fixed deposits to ensure a return.

The remaining funds are invested in world stock markets and commercial property. An additional bonus is then paid depending on the annual profit made. In good years for the market, the companies build reserves so that funds are available to top up returns in bad years.

Thus, providing a strong company is chosen, investors can be certain that their investment will rise each year. At present, returns of up to 11 per cent are available in sterling and 9.25 per cent for dollar and euros. It is possible for investors to withdraw their funds before the five-year period but they will have to pay a surrender penalty.

However, for those who require income, penalty free regular withdrawals can be taken, usually up to 7 per cent of their initial investment.

For the cautious investor or one where getting a return to out pace inflation is more important than taking the risk of losing some or all of their investment to gain a better return, there are some excellent deals in the market. However, to quote a well-known American police series "be careful out there".

The author is associate director in the Dubai office of Towry Law International.