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Mutual vs. segregated funds: the difference it makes

by | Jan 22, 2012 | OTHER, SELF-PUBLISHED

Q – My assets are held in segregated funds at a large insurance company. Looking at my holdings, they seem to be similar to mutual funds. What is the difference between segregated funds and mutual funds? What is the cost difference between the two? – Mary M., Niagara Falls, Ontario

A – Both mutual funds and segregated funds provide investors the opportunity to invest in stocks and bonds managed by a professional money manager. The money manger of a mutual fund and segregated fund company both look to invest the monies contributed by individual investors into a range of investment funds. When you purchase these types of funds, you are pooling your money with other like-minded investors to achieve a desired investment return. The difference between the two types of funds lies in how they are structured. Let’s look at mutual funds first:

A mutual fund is money pooled and invested on behalf of unitholders in securities that may include stocks, bonds, and money market investments. These types of funds are regulated by provincial securities regulators and provide no guarantees on investment performance. Mutual funds are best suited to people who want a wide variety of specialized fund choices in their investment portfolio. When you invest in these types of funds, you are willing to give up guarantees for potential increased returns. In reality, you could lose everything you invest. Average MER, or Management Expense Ratio, is between 0.50% and 3.0%.

Segregated funds, on the other hand, are insurance products. Your premiums (after fees, or “net of fees”) are invested in the segregated funds of an insurer, which, in turn, invests in securities such as stocks, bonds, and money market investments. Securities are held inside a life insurance policy that you own. Segregated (“seg”) funds are regulated by Provincial Life Insurance Acts. These types of funds usually provide a guarantee of between 75% and 100% of your principal at the end of a specific period of time, usually 10 years or at death. Seg funds also provide protection from creditors while mutual funds do not. Average MER is between 2.5% and 6%.

Mary, Segregated funds are more expensive then mutual funds but do offer certain advantages over mutual funds. The choice of investment vehicle really depends on your tolerance for risk. I recommend you speak to your investment advisor to determine if you are giving up potential returns by paying a higher MER for the segregated funds or if the higher fee associated is worth the guarantee to you.

If you are close to retirement and are concerned about the current market volatility, then perhaps you are invested correctly. On the other hand if you are a between 35 and 50 and have a moderate risk tolerance, you might want to consider mutual funds. – R.T.

© 2023 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.

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