With-profit policies have a part to play in the plans of cautious investors, according to a report released this week. The report from independent fee-based financial advisers Moneywise says with-profits funds will continue to perform their basic task of doubling investment yield without a corresponding hike in risk, despite the recent bad publicity surrounding them.

With-profit funds have attracted adverse comment in the aftermath of the Equitable Life fiasco, especially in a declining stock market environment, where the value of such products has become uncertain in the minds of investors. The introduction of penalties by several insurers to stop people withdrawing funds early from poorly performing with-profits funds has also damaged their image.

Such funds are also embroiled in a debate over a lack of transparency in how companies calculate bonus payments in relation to actual investment performance, with several reviews ongoing in different jurisdictions.

However, Moneywise says with-profit funds will keep their promise provided investors' expectations are "tempered and measured" - "if, say, 6 per cent to 6.5 per cent per annum tax paid in a secure environment fulfils expectation".

It accepts a reduction of annual declared bonus rates in the short term is likely given the current state of markets.

With-profit funds use primarily a mix of equities and government bonds to try to outpace inflation, protecting the real value of investments. Uniquely, they are designed to smooth the peaks and troughs of the markets, with some of the profits in good years being withheld to ensure no dramatic downturn when markets fall.

Another attractive feature for cautious investors is that annual bonuses, once declared, cannot subsequently disappear. Most of the nine providers in the Irish market also provide certain guarantees on fund performance.

Moneywise admits the nature of with-profit funds renders them unsuitable for investors looking for open access to their money and who want to maximise capital growth but can accept the attendant risks. It accepts that investors looking for transparency may be discouraged by the opaque actuarial process by which annual and terminal bonuses are determined.

However, it says cautious investors with a medium- to long-term horizon and those looking for a modest tax-free income from their investments should consider with-profit funds, despite the ongoing poor publicity.

Copies of Guide to With-Profits Investment 2001 are available from Moneywise at 6788 011