The tentacles of destruction in the US housing market appear to be spreading with Countrywide Financial warning that an increasing number of "prime" borrowers are falling behind on payments of home equity loans.

The dramatic losses and suspensions on withdrawals at US fund manager Bear, Stearns & Co and local operator Basis Capital underline just how seemingly distant events - like concerns about the US subprime mortgage market - can suddenly diminish an investors' assets. Reports suggest that the US credit jitters are set to continue.

Robin Bowerman, Head of Retail at Vanguard Investments says, "The question that really arises from these fund losses is not that they happened but rather did the investors who handed over money - and the advisers who recommended the funds - fully understand the risks they were signing up for."

This liquidity crisis serves as a timely reminder that advisers need to look beyond a fund's 'label' and consider the underlying assets and do a thorough risk assessment on behalf of investors.

Basis Capital for example offered structured credit products used by both retail and institutional investors as an alternative to fixed interest products. Most fixed interest products however invest in cash or low-risk fixed interest securities. The Basis Yield Fund invests in asset-backed securities, mortgage-backed securities and collateralised debt obligations that lost their value in the US sub-prime mortgage crisis.

The massive losses associated with Basis Capital remind us of the virtues of traditional fixed interest securities and re-inforces the need for these assets within a portfolio. Stable assets such as cash and fixed interest have lower returns but generally also preserve capital and produce returns when share prices fall.

Vanguard's Australian Fixed Interest Index Fund provides exposure to highly rated fixed interest securities that aims to match the total return of the UBS Australian Composite Bond Index before taking into account expenses, fees and taxes.

To view Vanguard's Australian Fixed Interest Index Fund profile click here.