Guaranteed mutual funds had been a hit in Europe long before they arrived in Hong Kong, so it is no surprise that innovative funds reaching our fragrant harbour are imports from France.

A fortnight ago, SG produced a guaranteed fund based on volatility. This week it is the turn of Credit Agricole Asset Management, and it is offering an exposure based on inflation, says Nicolas Sauvage, director and head of regional sales, marketing and client servicing.

Two years ago the $166 billion CAAM, then known as Indocam, introduced the first guaranteed funds linked to inflation indices to France, and is now bringing two funds to Hong Kong, tracking the US and Australian consumer price indices. They offer a 100% capital guarantee and either a 7% guaranteed return in US dollars or 15% guaranteed return in Australian dollars over a four-year period.

Both funds pay at maturity either the initial investment plus the guaranteed return or a percentage of the initial investment (called the participation rate) multiplied by the growth in the CPI over those four years. The participation rate will be set between 50%-80% at the time of the fund's launch next month.

Meanwhile, 96% of the investment will be invested in bonds and the remaining 4% into over-the-counter derivatives or used to pay fees and costs. Standard Chartered Bank is the distributor.

Tracking the CPI is a way to provide investors with a slow, steady growth rate (assuming inflation does gradually tick upward) and protection from the volatility of equity markets. It also represents a diversification for fund managers keen to provide more guaranteed funds in Hong Kong, but who face a glut of products tracking various equity indices.

Ayaz Ebrahim, CAAM's CIO in Hong Kong, notes inflation levels in both the US and Australia are at 15-year lows. Monetary stimulus is paving the way for a gradual recovery, commodity prices are rising and the weakening US dollar will mean higher import prices, which all suggests inflation will gently increase at least over the next year or so.

The possible fly in the ointment is a 'double-dip' recession in the US, but CAAM says conventional wisdom isn't betting on this happening.

The management fees consist of an annual 0.85% charge plus a 2.0% fee paid out of the NAV calculated after the first year. That adds up to 5.4% after four years, which is a lot if the investor is making 7.0% (in CAAM's illustration based on a 60% participation rate and annualized US inflation of 2.87% over four years, the total return is 7.2%). That's a high fee for the fund manager to invest 96% of the income in bonds, although the investor still gets the 107% back; these fees, paid out from annual NAV calculations, are not immediately visible.

Once again, guaranteed funds are a question of opportunity cost: these products may be better than bank deposits and are certainly safer than straight equities, but investors could do a lot better than an annual return of 1.75% for an annual fee of 1.35%.