GOING DOWN-GOING UP:PROPERTY INVESTMENTS are no longer the flavour of the month, as people are now looking at investment funds, writes Caroline Madden.

'Be brave when others are fearful and fearful when others are brave." This pearl of wisdom from Warren Buffett is reiterated regularly these days by investors trying to steel their nerve and plunge back into turbulent markets. Of course, it's easy for the Buffett to be brave, given that the Sage of Omaha is now officially the richest man in the world.

But what about the small unsophisticated investor who is not quite brave enough to join the vultures buying up distressed property in the US, yet is not quite fearful enough to leave all of their assets on deposit?

Over the past decade, property became the default option for many Irish investors, who were happy to milk this cash-cow for all its worth. However, the national obsession with bricks and mortar created a bubble in the property market that is now deflating. It skewed the Irish stock market so that it became overly reliant on the construction industry, a weakness that also permeated the wider economy.

The sheen has now most definitely worn off the previous "sure bet" of direct property investment, both domestically - where house prices fell 7 per cent last year - and overseas, thanks in no small part to the Michael Lynn scandal.

Furthermore, a generation of inexperienced investors, still smarting from the Eircom debacle, are unlikely to ditch their "once bitten, twice shy" mantra and begin dabbling directly again in individual stocks and shares any time soon, given the headlines proclaiming that global markets are in meltdown.

In this context, investment funds run by professional fund managers are likely to attract considerable attention from bewildered retail investors shying away from property and stockpicking.

However, regardless of the slick sales patter of the fund provider or the compelling case set out in the glossy brochure, it is vital for investors to take the time to weigh up the pros and cons of a fund before putting their hard-earned cash on the line.

Extreme volatility in global equity markets has resulted in a flood of new investment products offering a "capital guarantee", which guarantees that the customer will get their original investment sum back at the end of a specified term. This type of money-back promise may provide the customer with a good night's sleep, but it is not the win-win product it may appear to be on first sight - dig a little deeper and there is always a price to be paid.

This price generally materialises in a cap on the returns. For instance, an investor might be limited to receiving just 70 per cent of the upside in a fund's performance as a percentage of the customer's money will have to be tied up in cash and bonds to underwrite the guarantee to return the initial investment should markets move the wrong way.

For example, with the new Magnet Portfolio Secure from Friends First there is a risk that, under extreme market conditions, the fund will become 100 per cent invested in bonds and cash early in the term. "In this case, the potential for growth is removed," the fund's brochure says.

Professional Insurance Brokers' Association chairman Jack Fitzpatrick says that, historically, capital-guaranteed products tend not to deliver any return at all. "They just basically give you your money back after five or six years," he says. "There's an argument that you might be better off putting it into a deposit account."

Michael Cosgrave of Hibernian argues that it makes little sense to look for a capital guarantee at this point in the cycle when markets are low, as it will limit the upside of the investment.

Another trend is that commodities are being made increasingly accessible to the retail investor, either through stand-alone funds or by being incorporated into existing multi-asset products.

"Traditionally, commodities weren't a huge part of mixed funds or multi-asset funds," says Michael Hayes of Canada Life. "That has changed because of the huge demand for commodities from the likes of China and India."

Historically, commodities have provided returns that are uncorrelated to those of equities, he adds, thereby reducing the overall volatility of a fund.

However, commodities have been on a phenomenally strong bull run for five years now, with prices pushing ever higher, and some commentators are predicting that the commodities market is peaking. So, although it may be tempting to jump on the gold, oil or steel bandwagon, investors must first consider the possibility that the commodities boat has already sailed.

Financial stocks is another area that seems to be flavour of the month in the investment fund world, despite plummeting spectacularly over the last year, primarily on the back of fears of global recession and concerns over the subprime mortgage crisis in the US.

Ireland has certainly not been immune - Bank of Ireland has more than halved in value over the last 12 months, and Anglo Irish Bank is close on its heels, with its share price down 47 per cent over the same period. The value of the Iseq Financial index has plunged 45 per cent from its high in February 2007.

European financial stocks have not escaped the carnage either.

HIBERNIAN RECENTLY relaunched its Euro Financial product, marketing it as an opportunistic, vulture fund designed to take advantage of "real value" in the market. However, investors should bear in mind that, according to the Hibernian Investment Manager's website, the original Euro Financials fund has dropped in value by more than 20 per cent over the last year.

Bernard Walsh, of Bank of Ireland Life, argues that current market conditions offer a compelling investment opportunity: "Over the last number of months, many financial shares have been oversold, and their prices currently reflect more bad news than actually exists in the market."

It won't take a huge amount of calm in the markets for financial shares to recover, he predicts. However, before Christmas speculators were insisting that financials were oversold, that they had surely reached rock-bottom and must now rebound, yet in the new year they have continued their downward spiral. As the maxim says, no one rings a bell to tell you when the market has hit the bottom.

Whatever fund is being considered, it is vital to persistently ask about fees and commissions until a clear, satisfactory answer is provided, in order to avoid getting caught out by hidden charges.

It is important to find out the allocation rate, as this is the percentage of the person's investment that is actually used to buy into the fund. For example, a 98 per cent allocation rate means that for every €100 the customer invests, the investment company invests €98 and takes €2 as a charge.

It is also worth checking whether an early encashment fee applies. This can range from 1 per cent to 5 per cent, so if an investor pulls out within the first few years this penalty would quite possibly eradicate any profits made.

Consumers should also find out the annual fund management fee, which typically ranges from 0.75 per cent to 1.5 per cent of the value of the individual's investment.

For example, the brochure for Friends First's new Magnet Portfolio Secure fund shows that the allocation rate is 100 per cent on investments of €50,000 upwards, dropping to 98 per cent if the amount is below €20,000. A fund management charge of 1.95 per cent applies each year. This means that if an individual invests €10,000, the fund must grow by almost 4 per cent in the first year for that person just to be breaking even.

In Fitzpatrick's experience, fees and charges are transparent and tend to be "spelled out" in the fund brochures. "They're covered under the consumer protection code, so each product-provider has to comply with that," he notes.

However, consumers must be vigilant when it comes to specialist funds, such as those in the increasingly popular green or ethical sphere, as management charges tend to be higher in these cases because of the need for more extensive research, Fitzpatrick explains. "Management charges tend to be based on degree of specialisation of the fund," he says.

"You get clients and they'd like to go into ethically-based investment," he continues, "but they suddenly go a paler shade of green when they discover that they have to pay a higher fund management [ charge]."

When selecting a fund it may be worth enlisting the expertise of an independent financial adviser rather than going directly to providers (generally banks and large insurance companies), which will simply recommend their own funds.

In addition to providing unbiased advice, Fitzpatrick says that it is also possible for advisers to negotiate a more attractive allocation rate, but only if the advisers are prepared to offset some commission.

If you are going down the financial adviser route, the best choice is always an authorised adviser, who is obliged to search the entire market on their client's behalf. A list of regulated financial advisers is available in the regulated firms section of the Irish Financial Services Regulatory Authority's website (www.ifsra.ie).