Keeping your money in a deposit account may not yield much interest, while other options could bear more fruit but you must be prepared for some risk, writes Laura Slattery.

The European Central Bank's (ECB's) 0.5 per cent cut in its key interest rate last December might have been good news for borrowers but it wasn't such good news for savers with money on deposit as variable interest rates tumbled.

The continuing low interest environment is bad news for potential savers scouring the market for that elusive accessible, capital-guaranteed and low-cost savings product that will at least try to keep up with inflation.

Inflation is expected to average at about 4.8 per cent over 2003, according to the Department of Finance, while many banks are offering no interest at all on instant access accounts and little more on their longer fixed-term products, which often have high minimum deposits. Keeping money under the mattress might not seem as safe as a bank vault, but you won't be much less exposed to creeping inflation rates.

So what can consumers do? Is now the time to make the transition from being a "saver" to being an "investor" and plump for products containing the disclaimer that the value of your fund may fall as well as rise? Or is abandoning the comfort of a full guarantee on your money still too much to ask?

Stay with deposits: Consumers who don't want to see the purchasing power of their hard-earned money completely eroded by inflation can always follow the number one rule when choosing a financial product: shop around. Newspapers regularly publish tables of deposit rates at all of the main financial institutions, so comparing notes isn't difficult.

A quick glance will reveal that the interest AIB pays ranges from absolutely nothing on demand to 2.25 per cent on a 90-day notice account on amounts over €10,000. Bank of Ireland pays 0.1 per cent interest on demand and 2.05 per cent on a three-month bond on amounts between €3,000 and €25,000.

Ulster Bank's U First savings account offers a rate of 1.75 per cent if you have between €10,000 and €30,000 to spare. National Irish Bank pays 1.1 per cent on amounts between €2,500 and €10,000 and 2.4 per cent on amounts between €10,000 and €30,000 in its instant access savings account.

The best deposit rates are available for people who look beyond the main banks to Anglo Irish's seven-day notice account, which offers 3 per cent on balances above €2,000, and Northern Rock's demand account, which has a rate of 2.75 per cent on balances over €1,000.

"There's a massive variation out there, if you look at what the big banks are paying compared to Anglo Irish and Northern Rock," says Mr Brian Leslie, chief executive of online intermediary Prima Finance. "A half a per cent is very significant in my view," he adds. But consumers often don't look beyond the main banks due to inertia. "It's crazy but people don't want the bother of filling out forms."

First Active's limited-issue Elevator Account is also competitive, currently offering 20.5 per cent gross if the money - a minimum of €5,000 - is held over the full investment term of five years.

Interest rates increase the longer you leave the money in, starting off with 3.25 per cent in the first year to 5.25 per cent in the fifth year. However, the effect of the ECB rate cut means that savers who poured money into the first issue of the Elevator Account last August benefit from much higher fixed rates, ranging from 3.75 per cent to 6 per cent.

Mr Michael Kiernan, chief executive of online authorised adviser MyAdviser, recommends An Post's Government-backed, fully guaranteed deposit over five-and-a-half years, sold by its subsidiary One Direct. The return for a €50,000 investment on the Guaranteed Bond after tax and charges is 4.1 per cent per annum.

"This is a simple contract and the rate of interest is very reasonable, compared to the return the vast majority of deposits are getting," he says. "That said, it is not likely to beat inflation." An Post also has a five-and-a-half year saving cert, which pays 2.74 per cent per annum.

Consider tracker bonds: For cautious investors who want to look beyond straightforward savings products, tracker bonds could be the next step.

In a tracker bond, most of the lump sum is placed in a fixed-rate deposit account so that it can earn the interest needed to bring the sum back up to the full amount invested - this is the capital guarantee. The rest of the cash is used to buy an option on a stock market index or indices, tracking a specified basket of shares. This is where the investor will hopefully see at least enough of a return to make the tracker seem more attractive than pure deposit accounts.

Investors need to look at what percentage of the capital is guaranteed and what percentage of the growth in the indices they can benefit from, according to Mr Leslie. "If you want a full capital guarantee, then you're going to have to forgo some of the upside potential."

Mr Kiernan mentions two tracker bond options, both with a maximum return of 70 per cent: First Active's five-year six-month tracker, which has the advantage of a 12.5 per cent minimum guaranteed return, and An Post's tracker bond, which offers a 100 per cent capital guarantee at the end of the five-year 11-month term.

Look at with-profit bonds: With-profit bonds are a capital-guaranteed investment, which work by smoothing the returns on the fund over the term of the investment - typically at least 10 years. Life assurance companies pay a set annual bonus, declared each year, with any remaining profits awarded in the form of a terminal bonus on maturity.

But if the annual bonuses awarded over the course of the investment exceed the market performance of the fund, as they have done recently, then terminal bonuses are far from guaranteed. In addition, life assurers have steadily cut annual bonuses over the past few years in response to poor market conditions.

"There's a cloud over with-profits but, in a bear market, a lot of money has gone into trackers and with-profits. They're an easy sell," says Mr Leslie. "People can still sleep at night when they go into these products. They should at least be keeping pace with inflation."

Mr Leslie says he wouldn't recommend with-profits to people who are comfortable with the stock market, but they have a role for investors who are only prepared to take a small amount of risk and are in for the long haul. "With-profit bonds are a 10-year investment now. That's a very long commitment for people," he says.

Investors can take a regular income from most with-profit bonds throughout the 10-year period. Larger withdrawals are also possible but may be subject to penalties.

Scottish Provident and Bank of Scotland have teamed up for a product that is a mix of a with-profits bond and a high-earning deposit account, notes Mr Kiernan.

Half of the investor's money goes into Scottish Provident's with-profits bond with a minimum guaranteed return of 110 per cent of the investment after 10 years. The other half of the investment goes into a Bank of Scotland account that guarantees to pay the ECB deposit rate, plus an additional 2 per cent in year one and an extra 1 per cent in year two. Withdrawals can be made at any time without penalty.

Take higher risks: People with large amounts of money sitting in deposit accounts, earning little or no interest, should consider investing some of their money in more risky investments, financial advisers say.

Managed funds, which spread the investment over equities, bonds, property and cash, are one option for people who are comfortable taking a degree of risk.

There are low-risk managed funds available, says Mr Leslie, and, after a three-year bear market, he believes that now is "an especially good time" to get back into the market.

He cites New Ireland's Evergreen fund as a good example of a medium-risk managed fund that has held up well.

Pure equity funds are an even riskier option. "Such an investment needs to be held for the long term but, given current market levels, it may be a good bet for part of your portfolio," says Mr Kiernan. By spreading their investment across several options, people can potentially reduce their risk and still get the higher return that they desire, he advises.

People who are considering switching out of deposits to any higher-risk product should seek the help of a financial adviser, preferably one who is authorised to shop the whole market for investment products.

Inexperienced investors should be able to tell if a particular product is suitable for their needs or if investing in it is simply a shortcut to insomnia.

"There is no excuse for a product not being explained in simple English," according to Mr Leslie.