Segregated funds and mutual funds are both investment vehicles that represent a collective pool of funds that investors pay into while a fund manager makes the actual decisions regarding how the assets of the fund will be invested. That’s pretty much were the similarity ends. Segregated funds, while still an investment tool, are essentially insurance products, sold only by insurance companies and as such, the same regulations that apply to insurance products apply to segregated funds.
Unlike mutual funds, segregated funds offer a degree of protection against investment losses. Usually this guaranteed protection is around 75 – 100% of premiums paid or your initial investment at maturity or death. That means that even if the underlying investments inside the fund become completely worthless at maturity (usually 10 years) or at the time of the policy holder’s death, the policyholder (at maturity) or beneficiary (at death) will receive 75 – 100% of the investment into the fund. In the case of a mutual fund, if the investment loses value, there are no guarantees to the investors. The investor (you) stands to lose up to the full amount of their invested assets.
In addition to the investment guarantee, segregated funds also have other beneficial qualities relating to the death benefit portion of the fund policy. They offer the ability to bypass probate. This means that your beneficiaries get their money faster, your privacy is maintained, and probate fees are avoided. Additionally, segregated fund assets can usually be protected from creditors in the event of bankruptcy.
Advantages aside, segregated funds do have a few drawbacks. In some cases, management fees for segregated funds can be a bit higher than mutual fund management fees. Also, because segregated funds offer investors a guarantee against losses, segregated fund managers tend to be more conservative about their choices for investments, which in turn leads to more modest returns in comparison.
To get a more detailed understanding of your guaranteed investment options, contact me directly and I will guide you through the process of choosing the right product for your needs and goals.