MICs a diversified investment choice

Every investor knows that diversification is necessary for financial success. By investing in multiple types of investments, you can balance risk and return, increase stability, and avoid extreme ups and downs. Trying to time the market and find the best usually results in losses and high levels of stress.

Today, however, a standard 60/40 diversified portfolio of stocks and bonds may not be enough to generate desired returns. According to Bank of America, 60/40 portfolios are facing their worst returns in 100 years. Also, depending on how it’s calculated, Canada’s inflation rate is between 7% and 15%, and your investment needs to generate at least that amount to get a positive return and maintain the purchasing power of your savings. As a result, many investors today view alternative investments as a key component of a well-diversified portfolio.

Mortgages are one of the fastest growing areas of alternative investing, offering investors stable cash flow, risk-free real estate exposure of homeownership, and broad diversification beyond just equities and bonds. Mortgage investing also fulfills one of the core aspects of diversification. Low correlation with public markets, within this category, the Mortgage Investment Corporation (MIC) is one of the easiest ways to gain direct exposure to Canada’s mortgage market and is a strong asset to the country’s historically strong real estate market. It is one of the ways to obtain exposure indirectly.

Diversification is the last and best string of many fund managers, financial planners, and individual investors. This is a management strategy that mixes various investments in a single portfolio. The idea behind diversification is that different investments will yield higher returns. It also suggests that investors face less risk when investing in various vehicles.

MICs are diversified in several ways, so the overall investment is not a traditional stock or bond diversified selection, but individual MICs are diversified according to some criteria.

MIC seeks to diversify its holdings by investing in a wide range of geographies. Some focus on a single region or state, while others invest nationwide. MICs may be further diversified by rapidly growing regional suburban, urban, or rural areas, or by traditionally strong centers such as Vancouver and Toronto.

Canadian income tax law requires MICs to invest 50% of their assets in mortgages, and the remainder may be invested in commercial or residential mortgages.

The loan-to-value ratio compares the value of the property to the amount of the mortgage. For example, if the property is $500,000 and the mortgage is $400,000, the LTV ratio is 80%. Generally speaking, the higher the LTV, the higher the risk for the lender, but the higher the interest rate for the borrower, and therefore the higher the potential return. It seeks to balance risk and reward profiles to produce consistent returns.

MICs can have very different management styles for private lenders. Some borrowers prefer to focus on high-risk, high-yield loans. It may also have a more balanced approach, with an individual or team of experienced investment professionals managing the entire MIC portfolio.

It should have at least 20 shareholders, and none of them can own more than 25% of outstanding shares. This minimizes the risk for all shareholders if the borrower defaults.

Personal mortgage terms range from 6 to 36 months, with 12 months being the norm.

All borrowers are subject to rigorous screening. Creditworthiness, income, debt level, etc. are all important considerations when deciding whether to make a mortgage payment. This reduces the risk of default for investors.

The MIC can invest in 1st, 2^nd, or 3rd mortgages. The first mortgage is the primary or first loan on the property. The second mortgage is subordinate to the first mortgage, so in the event of default, the first mortgage will be paid off first. Underlying assets secure mortgages

MIC is a way to participate in the Canadian real estate lending market. This allows investors to generate passive income and indirectly participate in the Private mortgage market by owning shares in MIC. MIC’s management oversees the day-to-day operations of the mortgage portfolio and provides specific reports to keep the investor informed of her investment in MIC. In addition, based on the strict investment guidelines, the person in charge carefully selects housing loans.

When the market is booming, it seems almost impossible to sell a stock for less than you bought it for. Though, we are not able to know certainly what the market will do at any time, so we should be aware of the importance of a well-diversified portfolio in all market conditions. MIC funds have delivered returns of 6% to 11%, making them a diverse alternative investment option, especially when compared to the Canadian 10-year bond, which currently yields an average of just 2.0%.