With much of Australia shivering through its coldest winter in decades, a freeze is also being felt by thousands of everyday investors whose funds have been locked up in a troubled mortgage fund.

Angas Securities has frozen redemptions from its $200million mortgage debenture fund until at least December 2016 due to serious financial troubles.

The story is a familiar one. The company raised funds from the public and lent it to borrowers, who were typically property developers. The funds raised came from mainly retired people who were chasing higher income after interest rates fell significantly. As it turned out, more than a third of the loans are in arrears, leaving the fund unable to make payments to those retired people.

Property-related debenture funds have been popular in Australia. They issue unlisted and unsecured notes, which promise to repay investors at a future date, along with periodic interest in the intervening period. They’re advertised as a rolled gold, low risk alternative to term deposits with regular income payments and the real lure comes with interest rates significantly higher than you’ll find at a bank

For property developers who can’t get finance beyond what the bank will offer, these are an attractive source of funding. And that’s why most of these funds exist and investors should avoid them – banks won’t offer them credit because the risk is too high, so why would a retiree want to essentially become the lender of last resort?

Unfortunately, as ASIC notes, the risks associated with these unlisted debentures are often disguised. The issuer is not subject to the disclosure requirements faced by listed entities, prices are not readily transparent, and liquidity can quickly dry up.

The ease of getting access to your money may not be a big issue when everything is going well. But, as we saw in the financial crisis, this can quickly change. In fact, of the 49 property-related debenture funds operating in Australia in 2007, at least 25 have collapsed, with the loss of $4 billion in people’s savings.

In one of the worst cases and one we’ve previously written about, the regional Victorian non-bank lender Banksia Securities was placed in liquidation in 2012, owing more than $600 million to some 16,000 mainly older and rural investors.

The lesson is familiar one – risk and return are related. Promises of high interest returns, beyond what you’ll find at the bank, often mask significant risk that can not only put your income, but your entire capital at risk.

The good news is that you can lower these risks by investing in a diversified portfolio of high quality fixed interest securities like bank bills, government and corporate bonds that offer exposure to the two drivers of returns in this asset class—term and credit.

The securities should be highly liquid and subject to competitive and transparent pricing in global markets. Diversifying across many issues tempers credit risk and diversifying across many currencies tempers the risks associated with lending your money out for longer periods.

Depending on each investor’s risk appetite, tolerance for volatility and return requirements, these fixed interest exposures can be tailored to individual need and be built into a broad asset allocation that also includes shares and listed property.

Slick commercials about better-than-bank returns may be tempting, but it is always best to be clear in your own mind about what you are investing in.

After all, a long cold winter can be made worse when your money is frozen as well.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

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