A new fund lets you share in stock-market gains and offers a guaranteed return. But it will cost you. May 31, 2009 Chasing a horse that's already left the barn is one of the oldest mistakes in the investing playbook -- ask anyone who bought tech stocks in early 2000 or energy stocks in the spring of 2008. Just as those investors fell victim to the lure of quick profits, many today are paralyzed with fear. And now the new S&P 500 Capital Appreciation (symbol SSPAX), a so-called principal-protected fund, is here to trip them up.At first glance, the fund sounds like a sure thing. It vows to return at least 150% of your principal in ten years, less fees and expenses, provided you invested at or below the fund's net asset value per share at inception ($10). At the same time, the fund lets you tap the potentially boundless gains of Standard & Poor's 500-stock index. But then there's the fine print. Those fees and expenses knock your 150% minimum return down to about 119% -- meaning a minimum NAV of $11.94 in ten years. That's an annualized gain of just 1.7%. What's more, you're promised that return only if you hold on until the fund's "special redemption" date, December 1, 2018 (after that, the fund turns into an ordinary S&P 500 index fund). And those boundless gains of the S&P 500? That refers only to the value of the index; you can kiss dividends goodbye. The fund's managers buy options on the S&P 500 to ensure the fund keeps its principal-protection promise. But it's expensive protection -- the cost of those options accounts for most of the "fees and expenses" eating your returns. Advertisement If the S&P 500 appreciates over the next ten years, you'll reap some, but not all, of its price gains because of fund expenses and the fluctuating value of those options. On average, your gains will lag those of the index by 1.6 percentage points per year, says Ramesh Menon, founder of Structured Investment Management (SIM), the New York City firm that runs the fund. Moreover, the importance of those lost dividends can't be overstated. Over the past ten years through April 9, the S&P 500 declined at an annualized rate of 4.4% when you look at price appreciation alone (or in this case, price depreciation), but it lost only 2.8% annualized when you factor in dividends. The S&P 500 recently yielded 3.4%. Menon thinks this type of fund could be a serious contender to replace target-date retirement funds. Target-date investors "need to be invested in the stock market because that's where the returns have been historically," says Menon. But because those people know they're going to need a particular amount of money at a particular time, "they can't take any risk with respect to their principal over that time," he says. Menon is hoping that the fund's accessibility -- you can buy it for a $1,000 minimum initial investment through SIM and for a $2,500 minimum through the Fidelity and Schwab retail fund networks -- will make it a contender for individual investors. (As of April 9, the fund's NAV per share was $9.81; if you bought at that price, you'd still be guaranteed an NAV of $11.94, amounting to a minimum annualized return of 2.1%.) Advertisement Better times ahead. That kind of a safety net could have been a boon over the past ten years. But the sheer immensity of the past decade's decline makes it unlikely that the market's performance over the next ten years will be similar. Instead of hunkering down in some contraption that plays on their fears, long-term investors should take advantage of the most favorable buying opportunity in a generation. One way to do that is with a low-cost index fund, such as Vanguard Index 500 (VFINX), or an exchange-traded fund, such as SPDR S&P 500 ETF (SPY).