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What are mortgage funds?

Canadian mortgage funds invest in commercial, industrial and/or residential mortgages and mortgage-backed securities. A mortgage-backed security is a unit of a fund that invests in insured home mortgages that pays interest and part of principal.

Mortgage funds typically hold the majority of the portfolio in mortgage-backed securities, and a small amount in cash and Canadian bonds.

These types of funds offer a good trade-off between risk and return and are similar in volatility and risk to short-term bond funds. For this reason, some investors use mortgage funds as alternatives to money market funds or short-term deposits.

Most mortgage funds are RRSP eligible and aim for safety of principal and regular income. Interest is paid either monthly, quarterly or annually. Mortgage funds usually have average terms to maturity of less than five years.

Be aware:

When investing in mortgage funds, it is important to look at the portfolio mix. Most are pure mortgage funds, but a few hold a mix of mortgages and bonds making them a little more volatile.

As well, mortgage funds are typically more expensive than money market investments and some bond funds in terms of management expense ratios (MERs).

Not all mortgage funds are created equal. As with any investment, analyze the fund’s portfolio before you invest.