Are 'target' fund returns really safe from a slide?

Investors looking for a home for this year's cash Isa allowance should be wary of fund managers' latest wheeze, says David Budworth in The Sunday Times.

Investors looking for a home for this year's cash Isa allowance should be wary of fund managers' latest wheeze, says David Budworth in The Sunday Times. They have launched funds, called "target" or "cash plus" funds, that claim to offer a better return than bank and building-society accounts (say two to three points above the base rate), but without the risks of the stockmarket. UBS and Nationwide already offer them and DWS, formerly known as Deutsche Asset Management, plans to launch its RateBuster fund in March.

So how do these new accounts work? They are all structured slightly differently, but in the case of the RateBuster fund, DWS will invest the capital in the money markets at six-monthly intervals with a guaranteed return of, say, 5%, says Paul Farrow in The Sunday Telegraph. It then invests this 5% interest in a managed account run by Deutsche Bank, which is in turn invested in currency and interest derivatives in a bid to generate the additional 3% target return. DWS and Deutsche have an agreement whereby Deutsche is liable for any negative returns: if Deutsche loses all the money, then investors will not earn any interest on their initial stake. Any gains made are added to the fund and locked in at the next six-month period. So while the interest' portion is at risk, your capital is safe.

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