Competition among fund managers in Hong Kong to attract retail money into guaranteed mutual funds is forcing bigger guarantees over shorter amounts of time.

ABN AMRO Asset Management is now offering a fund that guarantees 108% of the principle, which is at the high end of the range, and only over a maturity of 2.5 years, which is at the short end. More money sooner, in other words.

It is a foreign exchange product based in Australian dollars, so the 108% guarantee just pips six-month bank deposit rates in Australia on a per annum basis, and outpaces six-month Hong Kong bank deposit rates by a mile.

Like with all guaranteed funds, however, a savvy investor should question whether this is really the best way to put money to work.

The firm is targeting Hong Kongers holding Aussie dollar deposits, or who own property in Australia, are sending children to study there, or are planning to retire Down Under. ABN AMRO's internal research has determined that of those investors willing to invest in foreign currencies, 82% favourably view the Australian dollar, and so far $380 million of Hong Kong retail investments is already in Aussie-dollar denominated guaranteed funds û nearly 20% of all guaranteed funds issued of late.

To compete with existing Aussie-dollar guaranteed funds issued by the likes of HSBC, Hang Seng Bank and BOCI-Prudential, ABN AMRO has provided a fund with shorter duration. It also waives any redemption fee and allows investors to switch free of charge into other ABN AMRO funds before maturity.

That's a good deal. Now let's look at the fine print.

The firm is asking for a 1.5% annual management fee charged up front, i.e. 3.75%, plus the usual custody and other associated fees.

Solange Rouschop, head of the firm's structured asset management group in Asia, says the high guarantee requires most of the income to go to fixed-income investments, likely 90% to 95%. After charges and fees, the remainder will go to options linked to the ASX200 Price Index in Oz and the US S&P500 Index.

Like all guaranteed funds, the guarantee is presented as a minimum return. The other upside potential comes from following both the ASX200 and the S&P500. At maturity investors get either the 8% return or a quarterly averaging of the two indices.

But looking at how this latter feature works suggests that investors are likely to get just the 8%.

The marketers say having two indices increases the opportunities for an investor to benefit. After all, to double the markets means you double the possibility that one will really outperform. ABN AMRO then creates a formula in which it counts the better performing index as 75% of the average. So it seems like a no-lose proposition.

A more sceptical view might wonder if including the S&P500 in a 2.5-year fund is a safe bet on the manager's part that the US markets won't work miracles, so surely the ASX200 will do better (it is expected to do rather well) û so really this isn't doubling the opportunity but building in a way to mitigate the upside of Australian equities by 25%.

Moreover the participation rate (the percentage of the option that is actually used to calculate the fund's return) is low compared to many funds, expected at around 40%.

Although it is possible that outstanding performance by the US and Australian markets over the next two-and-a-half years will provide investors with a return substantially better than 8%, it is not very likely.

Investors bullish on Australia would do better to simply invest in Australian equities. They are paying a high fee for what is in essence a bond fund. For that same 1.5% annual management fee they can capture plenty of upside.

Of course, the popularity of guaranteed funds attests to the reluctance of Hong Kong investors to test equity markets directly. And indeed guaranteed funds offer mildly better prospects than bank deposits. It is, as always, a question of opportunity cost and investor education.