High income but low risk from F&C

A NEW PEP launched by Foreign & Colonial has managed the alchemy of producing an extremely high monthly income from a low- risk investment package.

It is all done via a unit trust that uses options to bolster returns and damp down exposure to losses.

The core of the portfolio is a 55 per cent investment in blue chip equities. This portion has to be more than half the investment to retain the trust's eligibility to be included in a personal equity plan and deliver tax-free income. About 45 per cent of the fund consists of income-generating money market instruments and cash.

The fund will sell the right to buy the equities held by the fund (call options) to generate extra income for the trust, but this will dampen the possible gains - and losses - for investors. It will also sell the right to offload these equities (put options), which would be triggered if the prices fell more than 5 per cent. It will also hedge the cash element by selling put options.

In effect, some of the future capital gains are sacrificed for current income - this should be 10 per cent gross.

So if the fund is held within a PEP this is what investors will receive. F&C believes this return is sustainable as long as base rates remain between 4 and 14 per cent.

There is an initial charge of 5 per cent and an annual charge of 1.5 per cent. The minimum investment is pounds 2,500.