This week, the band Radiohead offered fans the chance to pay whatever they liked for its latest album when they downloaded it from the official website.

Commentators applauded the band’s innovation but were worried that this was the final sign that the music industry had been so crushed by the effect of illegally downloaded music that it had given up all hope of making money.

In reality, the move turned out to be a brilliant marketing coup. The album has had rave press reviews and many fans who might illegally have obtained it for nothing have rewarded the band’s faith by choosing to pay.

The success of this enterprise is proof that the record industry can still be a very profitable area of investment if you know where to look, says Duncan Reid, commercial director of Ingenious, the media investment business.

“Artists are changing the way they make money,” he explains. “Take Prince. He gave away his latest album with the Mail on Sunday. All this means is that he got the paper to pay for it rather than fans, so he did not lose out in any way.”

Internet downloads, mobile phones and coffee shops- turned-music publishers are changing the way the music industry garners profit but, according to Reid, the entertainment business is an increasingly successful component of the UK economy.

Ingenious invests in music projects through its venture capital trusts (VCTs), and has backed artists such as Peter Gabriel and the band Travis. Now, it is backing the debut album of a Newcastle indie band called The Orange Lights with a £824,000 investment, as part of its Music VCT2 which has a budget of £26m.

Reid says the band has a songwriter with a proven track record but stresses that allocating music investment is not limited to liking the bands, but the management behind them. “We were impressed by the band and the people around the band,” he says.

Projects such as this one will bring new investors into VCTs, which have become less popular in the past six months, says Philippa Gee, investments director at Torquil Clark Holdings.

VCTs are tax-efficient investment funds that offer investors flexibility and control over their investments. They have proved a popular alternative to pension investment but are generally best suited to wealthy investors or those who have a specific interest in a business.

They were introduced to the UK in 1995 to encourage private investors to put their money into unlisted small or start-up companies.

The benefit to investors is that VCTs offer relief from income and capital gains tax (CGT) – and there were no changes to the rules in this week’s Pre-Budget Report. But the rules restricting VCT investment were ratcheted up in the last Budget.

Back in March, Gordon Brown watered down the income tax relief from 40 per cent to 30 per cent and announced that VCTs and enterprise investment schemes would not be able to invest in any company with more than 50 employees. The Treasury also stipulated that no company could receive more than £2m from a VCT scheme.

To take advantage of the tax breaks, investors must hold a VCT investment for more than five years, otherwise they will be subject to income tax at their usual rate. So VCTs are not a suitable option for anyone who may need to extract their money in the short term.

However, dividends from VCTs are still not liable for income tax and any profits are exempt from capital gains tax.

For those with large sums to invest, there are limits to the amount that can be put into a VCT. Each individual may invest up to £200,000 every tax year but there are further restrictions on the sort of company that can be invested in.

VCTs can only put money into companies that are not yet listed on the main market, and must ensure that no more than 20 per cent of the company’s business consists of activities such as leasing assets.

The number of restrictions and the decline in the tax break has led to a decrease in the number of investors interested in the products, but opportunities to invest in areas such as music or entertainment could be key to rejuvenating interest, says Gee. However, only those suited to the risk profile consider putting their money in.

“Investors need to remember that VCTs are very high- risk products,” she says. “What you get back can be considerable but so can the losses. You need to go into this with your eyes open.”

The answer, she says, is only to invest money that you can afford to leave for a significant amount of time and not expect to touch it for at least five years.