Australian investors may be avoiding Australian mortgage funds because they are confusing them with the US sub-prime situation, Australian Unity Investments (AUI) head of mortgages Roy Prasad said.

Publicity on the troubles besetting MFS and City Pacific in Australia have also shaken investor confidence in conventional mortgage funds, he said.

Like other mortgage fund managers, AUI has experienced outflows in the past few months, especially from its High Yield Mortgage Trust.

"It's been a fairly tough start to the year," Prasad said.

Sub-prime mortgage backed securities bear no resemblance to conventional mortgage funds available in Australia, which generally lend only on first mortgages against high quality property.

"It's a very different style of investing. Most Australian mortgage funds follow strict lending criteria, significantly reducing risk," he said.

Diversification - both in terms of geographic as well as property sector diversification - is essential in order to manage risk, according to the mortgage specialist.

"We would never have more than 10 per cent of our mortgage funds in construction and development loans for instance, even in our high yield fund," he said. 

Some high yield funds allocate as much as 50 per cent to these forms of higher risk loans.

While even first registered mortgages may not be risk-exempt, the risk is carefully managed, he stated. 

"And even if there are defaults, as long as the property is of high quality and there aren't major time pressures, first mortgage holders usually get their money back," he said.

With many investors defaulting to high interest term deposits and online accounts, Prasad also reminded investors to reconsider conservatively managed, conventional mortgage funds.

"They give investors a consistent monthly income with the diversification, and lower levels of risk, needed in portfolios," he concluded.