Mortgage Funds

As their name suggests, mortgage funds invest in pools of mortgages. The properties whose mortgages are suitable for mortgage funds are prime residential properties located in major Canadian cities, although commercial and industrial mortgages may also be included in the asset mix. Residential mortgages held by mortgage funds are generally guaranteed by the Government of Canada through the National Housing Act, or by a Canadian bank, and many bank mortgage funds will buy back any mortgages they hold that default.

The mortgages held in the fund tend to have maturity dates of less than five years; commercial and industrial mortgages will have longer maturities. Similar to money market funds, mortgage funds have interest rate risk, because as the mortgages in the fund mature, the fund manager invests in new mortgages. Their interest rate will depend on the prevailing level of interest rates when mortgages mature and the availability of offerings in the mortgage market.

Mortgage funds make regular interest payments to unitholders, paid monthly, quarterly, or semi-annually. There is very little room for capital gains, because mortgages held by funds in their portfolios are not traded. However, capital gains and capital losses are possible when units of the fund are sold.

Mutual funds in Canada are highly regulated, and performance data is easy to acquire. Mutual funds are issued by prospectus and it is important to note that returns are not guaranteed and principal is not guaranteed.† Unit values fluctuate in value and investors may pay commissions to buy and/or redeem and sell mutual funds.† Investors should always read the prospectus prior to making an investment into a mutual fund.

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