Guaranteed products are in. With the Hang Seng Index losing 15 per cent of its value and the Nasdaq Composite Index 22 per cent lower than it was at the start of the year, there is little wonder disgruntled investors are turning to capital-protected products. These are products structured to yield gains from major stock market indices while limiting downside risks. For investors who dream of having their cake and eating it too, 'guaranteed funds', or 'asset protection products', appear to be the ideal choice. During a market downturn these investments protect investors from losing their original stakes, while not missing out on any long-term up-trend of the stock market. In the past, such funds were widely marketed in the West and only available in Asia through financial advisory firms. But recent market volatility has seen a few new offerings on the local market. CMG First State Investments last month launched its first guaranteed fund - CMG technology media and telecommunication (TMT) fund. It swept up US$122.2 million in less than three weeks, well exceeding its target. Wasting no time to capitalise on a successful business model, CMG launched the second of its guaranteed series - a CMG health & biotechnology fund - at the same time trying to catch on to another hot investment theme. Similar to the TMT fund, the Health fund offers full capital protection, including a rebate of transaction cost, provided the fund is held until maturity. On top of the safety, it also provides investors a taste of excitement by investing part of the portfolio in health and biotechnology stocks. SSB (Salomon Smith Barney) Citi Asset Management - a member of Citi Group - last week announced its Citi Garant Health Science fund, another guaranteed fund. Abbey National Offshore - a banking group with its headquarters in the Channel Isles, also jumped on the bandwagon to launch its 'offshore choices', a group of five-year guaranteed products linked to different market indices. For example, its Sterling product will be linked to the FTSE-100 Share Index while the US dollar product is connected to the S&P 500 Index. Salomon Smith Barney equity strategist Jason Kolbert said its guaranteed fund had 'no downside risk' and would provide 'attractive returns for investors'. Abbey National boasts a potential 65 per cent return while promising to give you back all of your money. Sounds perfect. How do they do it? Methods differ from fund to fund, but the following strategy is typical: most of the capital is put in low-risk assets, such as cash or bonds, while the remainder is invested in high-risk, high-return derivatives such as index futures, or stocks in a hot sector. Therefore, the upside of the guaranteed funds are really restricted, despite the exotic names attached to these funds. For example, the CMG TMT fund invests 80 per cent of the fund in fixed-income products and the rest in technology stocks. With most of the investment locked to generate the guarantee, claims that such funds will 'provide up to 60 per cent of return', are plainly un-achievable. The lower participation in the equity market means that, in a rising market, you reap less than a simple index or tracker fund that invests directly in equities. That is the opportunity cost for reducing volatility. A more realistic objective for this type of fund can be seen in the annual return choice that Abbey National Offshore offers. It said that the interest calculated and paid at the end of each year will be no more than 8.5 per cent to 11 per cent, depending on the currencies. The return may be better than your bank deposit, but not much. In addition, guaranteed funds normally charge significantly higher fees than index funds, and usually involve a longer investment horizon. Another thing to be aware of: the guaranteed funds tend to lock the investor in for a medium to long-term period, with substantial penalties for cashing in early. 'The guaranteed products are for those investors that want a reasonable return that can beat the inflation, the bank rate and avoid the risk,' said a fund manager.