By This Is Money Updated: Returns from stock market-linked bonds are based on an index. Most commonly a product's fortunes will be based on a share index such as the UK's FTSE or a basket of shares. More imaginative providers also link bonds to other indices such as house prices, for example. Possible returns tend to be less than investing directly in a stock market fund but in exchange investors are given peace of mind in knowing their capital has some sort of protection.

You must also part with your cash for a certain period, typically around five years. This is known as soft protection. Investors can either take regular income or pick up capital growth at the end.

Some offer a bit of both. The products tend to be labelled guaranteed growth bonds, high income bonds or recovery bonds.

Most investors buy from companies that effectively just market these structured products: The likes of GE Life, NDF, Scottish Mutual, AMP and Scottish Amicable, for example, hand over investors' money to Abbey National Treasury Services, the largest operator in the market, which puts the cash to work in stock and futures markets.

So long as the bank that is hedging the bets doesn't go bust, then your money and promised returns are safe. This system also means charges are normally factored in to the hedging process so there should be no extra annual fees for you.

These bonds are most popular with investors looking for high income. If you are willing to part with your money for a long spell - more than five years - then these are probably not right for you. The higher protection is paid for with lower potential returns.

If you are investing long-term then there is less need to protect yourself as the ups and downs should be smoothed out over time. Enticed by the prospect of 'guaranteed' high income, many investors lose sight of the danger to their capital. As a rule of thumb, higher income means your taking a bigger risk with your capital.

Why Britons are rightly rejecting stock market bonds - Telegraph

Plus some plans are incredibly complex - the index a plan follows may have to hit regular targets throughout. And often products have very different structures making them difficult to compare. A further danger comes with bonds that follow a basket of shares — some include just 30 — rather than one that tracks an official index. For each stock that falls below a certain threshold, chunks of the original capital can be eaten away.

These were the most controversial of all stock market-linked bonds.

If the index fell below a certain point, investors found a large chunk of their money was wiped out - sometimes all of it. Many of these bonds were linked to technology indices or markets - such as the Nasdaq in the US - which plunged after the dotcom bubble burst.

Some investors have been able to claim back compensation if they were not properly warned of the risks. You should speak to an independent financial adviser to decide whether structured products are right for you. But if you are certain of the bond you want, contact an adviser who rebates commission they receive from the plan provider.

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