PARTS of Australia's $1.3 trillion funds industry are starting to bleed badly while the Government and Opposition squabble over the best way to refine the proposed unlimited guarantee on bank deposits.
Last night two major Australian funds with $4 billion under management were frozen in the flight away from risk.
Perpetual suspended redemptions for about half a dozen of its monthly income and mortgage funds, while AXA Asia-Pacific announced that it had frozen redemptions from its Australian Monthly Income Fund for six months.
The two entities have just over $2 billion in funds each under management.
Treasurer Wayne Swan spoke with Perpetual chief David Deverall last night and said the funds industry was being hit by "a multitude of influences and cross currents".
But the Treasurer also conceded there had been "some knock-on effects" from the unprecedented October 12 decision to provide an unlimited AAA sovereign guarantee on all bank deposits.
Mr Swan urged affected investors to check with Centrelink about getting temporary financial support.
The funds industry, which dwarfs all bank deposits by hundreds of billions of dollars, has been caught in the downdraft from the banking guarantee as investors switch from risk to absolute safety.
The Government is proposing charging a fee on bank deposits of $1 million or more, but is still working out the details of its planned changes.
Hundreds of thousands of small investors are potentially affected by the problems developing in the funds industry.
Last night's decision by Perpetual and AXA is the latest in a string of funds which have frozen redemptions in the ongoing market fallout.
The funds industry comprises 8000 funds in shares, cash management and property which have around $1.3 trillion under management.
Property and mortgage funds with $18 billion under management have been hit particularly hard, followed by cash management funds.
The elephant share of the funds market -- funds in liquid share investments -- have been largely unaffected.
Investment and Financial Services Association chief Richard Gilbert urged the Rudd Government to act quickly to resolve the situation.
"We want the Government to clarify its position on the small group of funds that are at risk," he said.
About 24 funds have already been frozen including Australia's largest mortgage fund, the Challenger Howard Mortgage Fund worth $2.9 billion and City Pacific's $900 million First Mortgage Fund.
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