Top financial advisers say the Federal Government is struggling to find solutions to the mortgage fund redemption issue, and risks more unintended consequences if it moves to guarantee the products.
Asset managers including Perpetual, Axa, Challenger and Australian Unity and smaller managers have frozen over $20 billion worth of property, mortgage and income funds since last week.
Invamore Financial director Paul Daily, and HPH Solutions partner Adam Smith, both winners of the recent AFA Adviser of the Year award, said little could be done now.
"The surge of redemptions in mortgage funds is tied to what is happening generally in markets at present," Daily said, referring to investor confidence.
"But if the Government moves to guarantee them, people will be moving out of fixed-interest and bond funds. The Government may also be pressured to then guarantee these investments. I am not sure what the answer is."
It is not the Government's role to guarantee investors' funds or deposits, he said. "If you are an investor and you want a government guarantee, the traditional security has been a 10-Year Treasury Bond - it delivers returns albeit at a much lower rate," Daily said.
"Now the Government has made deposits like a Treasury Bond, so why would you want to be a bond holder? What is going to happen to the bond market?"
Made impulsively during a crisis meeting on October 11 and 12, the Government's banking guarantee was understandable, however, there needed to be more thorough discussions on its consequences, Smith said.
"This is the issue the Government has created now. It is obvious that a lot of people want to extract their funds and put [their money] into more secure areas," he said.
The Government could extend its bank to mortgage funds, but risks investors demanding the same protection for mutual funds, he said.
