A few months ago the Federal Government announced that it would be introducing a guarantee on all deposits held in Australian banks, building societies and credit unions. For those who have their money invested in various bank deposit products, this was welcome news and went a long way to easing some of the uncertainty brought on by the global financial crisis.

However, there are a large number of consumers who have their funds in alternative investment options, such as mortgage funds and cash management trusts (CMTs) for example.

As CMTs are seen to be a similar product to managed funds, both they and mortgage funds are excluded from the Government’s new deposit guarantee.

Both mortgage funds and CMTs have experienced a significant increase in outflow numbers following the deposit guarantee announcement. Mortgage funds in particular have been in the spotlight recently as some $21billion worth of invested funds were frozen in an attempt to reduce the number of redemption requests.

Whilst these products have been excluded from the guarantee this does not necessarily mean that they are a similar type of product.

A mortgage fund uses investor’s monies to issue mortgage loans. Investors receive the interest payments that are made on the loans, once any relevant fees and expenses have been deducted. Mortgage funds generally invest in mortgages up to five years in length and are not considered a very liquid asset as a result.

A CMT, on the other hand, is a type of unit trust that sees investor’s monies pooled into high-yield strategies such as bank-backed securities and deposits. CMTs are usually involved in more short term investment options. This means that the investments are significantly more liquid when compared to a mortgage fund. Additionally, CMTs are slightly more flexible in their conservative investment options and this can result in some of the chosen investments being covered by the guarantee whilst others are not.

Since the announcement of the guarantee some of Australia’s biggest CMTs have been seen to move all of their investments to government-backed assets. So for those that prefer investment options other than bank deposits, there is still some degree of safety in the CMT products.

CMTs should not be confused with cash management accounts (CMA). CMAs are a deposit account with a bank, and as such, are fully covered by the Government guarantee.

At The Quinn Group we pride ourselves on keeping up-to-date with the latest trends and strategies in the financial sector. If you would like advice on your current or desired financial and investment situation, contact us on 1300 QUINNS or click here to submit an online enquiry to our team of expert consultants.

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