Colonial First State, one of the largest investment houses, has shut down its major mortgage fund which holds $850 million.

The Colonial, owned by the Commonwealth Bank, confirmed that it cannot make interest payments to investors and they will now have to wait for up to four years to get their money back.

"We have concluded that it is in the best interests of investors in the whole to terminate the fund and begin the process of returning funds", Mr. Brian Bissaker, Colonial First State Chief Executive said.

Chris Douglas, the co-head of fund research at investment house, Morningstar said that he is surprised by this move since Colonial First State is the biggest player in the mortgage fund market. He said that it is a big decision if a fund manager decides to close down a fund.

This has scared the investors that other mortgage funds may also be shut down. Chris Douglas however, does not think that is likely.

Meanwhile, a research by Morningstar last year revealed that more than 70 funds froze or limited redemptions.

They included funds run by the big players - Colonial First State, Perpetual and Axa Asia-Pacific.

Around $25 billion held by more than 150,000 shareholders, froze in late 2008 after a federal government move to guarantee bank deposits sparked a run on the funds.