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Mutual Funds vs Segregated Funds

07/6/22

Segregated funds and mutual funds are very similar: they are both pooled, diversified, professionally managed investment funds. Segregated funds, however, offer some unique characteristics that mutual funds do not. These include maturity guarantees, resets, death benefits, creditor protection, and probate advantages.

What You Need to Know

  1. Maturity Guarantees – Unlike mutual funds, segregated funds offer maturity guarantees, which means that the value of your investment at maturity will not be less than the specified percentage of capital that you invest. For example: If you were to invest $1000 with a maturity guarantee of 75%, at the time your contract matures, the insurance company would be obligated to ensure that at least $750 of your investment remains.
  2. Resets – Segregated fund contracts offer the option to “reset” your investment, so that the gains your investment has accumulated can be accounted for when calculating the maturity guarantee amount.  Provisions for these resets vary by contract.
  3. Death Benefit Guarantees – Some segregated fund contracts offer death benefit guarantees. These work similarly to maturity guarantees, except your beneficiaries are guaranteed to get at least a certain percentage of your invested capital.
  4. Potential Creditor Protection – Unlike mutual funds, segregated funds are issued by insurance companies. Due to this, in some circumstances, investing in a segregated fund could offer you protection from your creditors.
  5. Bypass Probate – Investing in a segregated fund gives you the ability to pass your investment directly to your beneficiaries, without the need for probate. This can save a lot of money and hassle for your beneficiaries.

The Bottom Line

Segregated funds can offer some valuable benefits that investors do not have access to by investing in mutual funds. It is important to note that segregated funds traditionally have higher fees than mutual funds. As always, it is important to work with your team of financial planning professionals to determine what investments are best suited for you.

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