With-profit bonds have attracted large amounts from cautious investors whose primary concern is that the amount they invest is guaranteed. There is nothing wrong with seeking that comfort, but investors need to understand that such guarantees come at a price and have implications for the asset allocation of the fund.

National Deposit Brokers has produced A Consumer Guide to With-Profits Bonds, which gives a clear explanation of the workings of capital guarantees.

Some companies pay for the guarantee out of the annual management charge. National Deposit Brokers believes this is the ideal situation, as the consumer knows exactly what they are paying and can see the impact of the cost of the guarantee on the fund as it grows. The Dublin-based authorised adviser hopes and expects this type of transparency will become the norm.

Other companies charge the cost of providing the guarantee to the fund, usually in a non-disclosed fashion. This can potentially lead to a poor terminal bonus.

Problems arise when direct comparisons of charges are made between products. A higher annual management fee may simply reflect the fact that the cost of the capital guarantee is paid out of this fee, the consumer guide states.

When a company provides a capital guarantee it must have the financial strength to stand over it. The more the fund invests in equities, the more potential there is for a call on that guarantee.

The procedure for measuring this risk provides an insight into the way guarantees affect asset allocation.

Firstly, the company will stress test thousands of scenarios under different market conditions and measure the percentage of cases in which the guarantee will be called in. The higher the exposure to equities in these tests, the more likely the guarantee will be required.

The more financial strength a company has, the easier it will be for it to meet any guarantees. It will, therefore, be able to afford more equity exposure than smaller companies, which will invest more in cash to bring them within comfortable levels regarding capital guarantees.

The with-profits guide advises investors to ensure that the investment allocation has not been overly compromised to provide the guarantee.

It states that a product would need at least 60 per cent exposure to equities to have good growth prospects over the longer term. Exposure to equities ranges from 80 per cent with the Irish Life product, to 36 per cent with Friends First.

Other with-profits topics covered by the guide include bonus rates, income options, early encashment charges, terminal bonuses, market value reductions and geographical equity analysis.

For copies of A Consumer Guide to With-Profits Bonds, published by authorised advisers National Deposit Brokers in Dublin, call 01 872 4000 or e-mail info@ndb.ie.