Chances are, you are contemplating RRSPs these days -- either topping up your 2002 contribution or making your 2003 contribution early to get the tax sheltering working for you sooner.

Manitoba residents are fortunate to have two high-quality labour-sponsored investment funds (LSIFs) to choose from as an alternative to conventional stock mutual funds.

LSIFs are a form of investing called venture capital and this is traditionally riskier than conventional stock market investments in mature companies. However, you wouldn't know that from the results of the last couple of years.

The real fact is that the returns of LSIFs have had a low correlation to the returns of the stock market. In other words, when the stock market has an exceptional year, the LSIFs have been mediocre, while the LSIFs have generally done quite well when the global stock markets have tanked, like 2000 and 2003.

The Manitoba LSIFs -- Crocus Investment Fund and Ensis Growth Fund -- invest in local companies. While by Manitoba standards many are large, all are tiny compared to the household name companies that are publicly traded on the stock exchanges around the world. This provides greater opportunity for growth but, in theory at least, greater risk. This must be acknowledged before you invest.

One important concept with venture capital is something called the "J-curve." It refers to the shape on a graph of the returns of investments in newer companies. Generally, the returns go down for a period before turning back up and going to a higher level. Venture capital must, therefore, be patient money as the returns are not expected to be immediate.

Sometimes the returns are more than expected and sometimes an investment can be lost if a new company fails or must consolidate and start over. These risks must also be acknowledged.

However, the track record of the two Manitoba funds has been pretty good. They are standouts amongst LSIFs across Canada and have had some pretty good years compared to mutual funds that invest in more mature, "stable" businesses. In fact, Crocus recently received a $10 million investment from another LSIF, the Solidarity Fund from Quebec, which paid "retail."

For many investors, the added benefit of tax credits and the feeling of helping create jobs in Manitoba are distinct benefits. As an adviser, I'm the first to acknowledge the importance of these two factors, but only after an investor understands what he or she is getting into.

Having given the warnings, I will then state that I believe that LSIFs and similar investments in small companies can provide useful diversification from traditional investments and even help manage the risk in a portfolio. Furthermore, by utilizing the additional tax credits (15 per cent on your provincial taxes and 15 per cent on your federal taxes, plus any deduction you have if you make a new contribution to an RRSP), you can achieve a number of other financial planning goals.

The additional tax savings could be used to make next year's RRSP contribution, to make an RESP contribution for your children or grandchildren, to pay down non-deductible debts, or even to spend. If the additional tax savings are used to earn money or create further tax savings, then you are achieving significant financial planning benefits from the compounding effect.

Crocus has now been around 10 years and produced positive returns in almost all of them. Both funds have a list of extremely well-run and successful businesses in their portfolio, although each has one or two problem children as well. One of the benefits for the businesses when they get financing from Crocus or Ensis is that they get additional support and management advice, which is often very helpful for young companies.

Before you invest, make sure you have a list of the companies your fund invests in, so that you understand what you really own. Although the fund has done a tremendous amount of research and due diligence into these companies (which is one of the reasons why their management expense ratios are higher than the average for a mutual fund), you are the one who must be comfortable with the investments made.

The maximum investment is $5,000 a year per investor to get the tax credit and your investment is locked in for eight years. After that hold period, you can actually redeem and reinvest to get fresh tax credits, as many early Crocus investors are doing this year. But, keep that hold period and the illiquidity in mind before you invest.

Please note that Crocus owns shares of Wellington West Capital, the parent company of my firm.

The preceding article is provided as an introduction to this topic and should not in any way be construed as a replacement for proper professional advice.

David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. His column appears Fridays. You can e-mail him at dchristianson@wellwest.ca