NEW YORK (Money Magazine) - If the two main motivators of investing are fear and greed, we've all moved heavily into the fear camp these days.

Last year investors yanked $27 billion out of equity funds, the first such net outflow since 1988, and poured $140 billion into bond funds -- a record, according to the Investment Company Institute.

Wall Street is pushing safe havens like stable-value funds, which guarantee against volatility, and principal-protection funds, which are insured against loss of principal (before fees) no matter what the markets do.

There are annuities with principal-protected investments and covered-call strategies and seminars to teach us the new rules of investing.

Even promoters from the old boom days have morphed into "safety" peddlers, hawking prime-bank schemes, credit-card protection and other safety rip-offs. It's enough to make your head spin.

There are enormous differences between the legitimate products and the illicit ones, and many of these products are simply playing on our fears. And buying on fear in a bear market can be as wrongheaded -- and as costly -- as buying on greed during a bull run. "Safe havens suffer dramatically when the stock market does really well, and the turn can happen quickly," says Jeffrey Kleintop, chief investment strategist at PNC Advisors, which manages more than $50 billion. Worse, as Kleintop says, "a lot of these products are very expensive."

Let's look at the good, the bad and the ugly investment products that promise safety -- at a price.

Marketed under a variety of names -- "stable value" seems not to be appropriate terminology to securities regulators -- these mutual funds are portfolios of short- to intermediate-term bonds, guaranteed investment contracts (GICs), or a combination of the two, with an insurance wrapper that keeps the fund's net asset value stable.

Over the past year, assets in these funds have increased 21 percent, from $261 billion to $315 billion, according to the Stable Value Investment Association. Their annual returns haven't gone below 5 percent over the past two decades, according to Hueler Analytics, which specializes in tracking stable value. "Stable-value funds can be a good, safe place to park cash where you will get something better than a money market and less than an intermediate bond fund," says Morningstar senior analyst Brian Portnoy.

Created for retirement plans, these investments make up 28 percent of all assets in 401(k)s, according to pension consultant Hewitt Associates. A few recently-launched retail funds have nearly $5 billion in assets.

Bottom line Stable-value funds are best for retirees with conservative investment needs, although younger investors may use them to replace or augment the conservative portion of a broader portfolio.

"A stable-value fund is absolutely not a replacement for equities but is a great way to dampen down the volatility in your overall portfolio," says Kim McCarrel, a manager at Invesco, which runs $37 billion in stable-value money and recently filed offering documents with the Securities and Exchange Commission to open a retail fund.

These funds are long-term holdings. Most are available only through 401(k) plans, and the retail funds are restricted to IRAs. The institutional funds are cheaper than the retail funds, but if you stick with no-load retail funds, costs are low. There are typically redemption fees on withdrawals in the first 12 months or when interest rates are rising.

Caveats If interest rates should turn back up, money markets will respond more quickly than stable-value funds because of the way these funds amortize gains and losses. "There is a lag effect," says Laura Dagan, chief operating officer at Dwight Asset Management, which manages $20 billion in stable-value investments, including the PBHG fund.

With interest rates at historic lows, stable-value funds returned 5.6 percent last year vs. 11.9 percent in 1984, according to Hueler. If rates remain at their current levels, 2003 returns will probably decline, and if rates turn up sharply, money-market funds could even outperform stable-value funds.

Note too that the SEC is inquiring into the way these funds value their portfolios. An SEC spokesman declined to comment. Reports from industry executives suggest that the issue is transparency rather than wrongdoing.

For true nervous Nellies, Wall Street has cooked up a new product that's selling like Internet stocks did in 1999.

Principal-protection mutual funds, which invest in a combination of stocks and bonds and guarantee that investors won't lose money -- before fees -- have exploded to $6.25 billion in assets at the end of 2002 from some $500 million a year earlier, according to Financial Research Corp.

These funds are a relatively new, bear market phenomenon. Aetna Financial Services, which had long sold annuities offering principal protection, launched the first one, Aetna Principal Protection I (now ING Classic Principal Protection I), in 1999.

Today there are some two dozen in existence or in registration, including funds from ING, Pioneer, Merrill Lynch, Smith Barney, Idex, Evergreen, Oppenheimer and BlackRock, according to FRC.

ING alone now offers 11 principal-protection funds, plus a series of annuities with principal-protection options, and has registered to open its 12th fund. "As long as our clients keep demanding the product," says Bob Boulware, president of ING Funds Distributor, "we'll be there to supply it. We do not view this as an opportunistic play on the market."

Related safe stories • How safe is your safe haven? • Protect your family

The structure of principal-protection funds is complex. They include both an investment portion and an insurance wrapper that guarantees investors will get back their principal, minus fees, as long as they stay in for the guarantee period -- typically five or seven years.

One problem for investors is that there's unlikely to be much upside from a stock market rebound since the portfolios are now overwhelmingly in bonds.

The big problem, however, is cost. Fees for the A shares run from 1.75 to 2.25 percent, according to FRC researcher Kristin Adamonis, versus an average 1.28 percent for domestic equity funds and 0.85 percent for taxable bond funds, according to Morningstar. (The guarantee fee accounts for 33 basis points to 100 basis points.)

Worse, these funds are sold largely as B shares, meaning higher annual 12b-1 fees. Plus, if you take your money out early, you may pay a deferred load, and the guarantee is not effective.

"Investors have been bloodied, and what they want is a guarantee," says Jerry Wade, a fee-only financial planner in Minneapolis. Wade says clients, mostly retirees, have begun asking about principal-protection funds, and he's been steering them away. "I don't think they're wrong for wanting a guarantee," he says, "but they are wrong to jump in quickly to what sounds too good to be true."

Consider this example from the prospectus for the first Aetna fund. Say you invested $20,000 in class-A shares when the net asset value was $10. After deducting the sales load of 4.75 percent, you would have $19,050 invested in 1,905 shares.

Assume also that the NAV increased to $10.02 at the beginning of the guarantee period. This means, according to the prospectus, that your guaranteed investment is 1,905 shares at $10.02 apiece, or $19,088.10.

In plain English, what they're saying is that if you park your money in the fund for the entire guarantee period of five years, you won't do worse than a 4.5 percent loss -- before any annual expenses.

"How does it make sense to say that you're protecting capital of $10,000 by giving $500 to a salesman who in five years promises you $9,500? You don't get your money back; you get what is invested back," says Morningstar's Brian Portnoy. (An NASD Investor Alert on principal-protection funds sent out in March also has a cautionary tone.)

Bottom line "These are expensive, marketing-driven products of no use to any investor," Portnoy says. Investors who have a long time horizon and a willingness to take risk would do better to be invested in no-load equity funds, while those who require a more conservative strategy would do better with bond funds or money markets.

Fear is a great tool for con artists, so it should not come as a surprise that supposedly "safe" investment con games are on the rise.

"With low interest rates and volatility in the markets, they pitch their scams as safety and high returns," says Joe Borg, Alabama's securities chief.

Prime-bank scams, in which promoters claim that investors' funds will be used to purchase and trade nonexistent "prime bank" financial instruments on secret overseas markets in order to generate large guaranteed returns, are believed to siphon at least $1.5 billion from investors each year.

Promissory-note scams also promise high returns with very low risk; in this case, the claim is that the notes are backed up by some solid asset, such as real estate or equipment.

In both cases, the amounts that the promoters are promising investors have dropped as the market has fallen, adding an air of legitimacy.

"You don't see people guaranteeing 150 percent returns with no risk anymore; now they'll guarantee 30 percent with no risk," says James Byrne, a professor of law at George Mason University and an expert on prime-bank schemes.

The SEC has brought more than 100 cases against prime-bank fraud promoters. In early March the Federal Bureau of Investigation did a sweep against some of these schemes; in one case, dubbed the Sweet Tea Masquerade, they arrested 51 people alleged to have defrauded investors of more than $31 million.

"Over the past three or four years, we've seen an increase in these crimes nationally," says Keith Slotter, chief of the FBI's financial crimes section, "and they're prevalent in Europe as well."

Bottom line If you think you've been scammed, you should contact the FBI's corporate fraud hotline (888-622-0117), the SEC's complaint center and the securities regulator in your state (you can locate yours through the North American Securities Administrators Association).