In a world of constant investment changes, it’s hard to keep up with all distinctions between the various fund options. Mutual funds tend to be fairly straightforward, but when it comes to segregated funds, they do offer some distinct differences that some people may not be aware of when differentiating the two. What is a segregated fund you ask? In simple terms, it’s a mutual fund wrapped around an insurance contract with a tidy bow on top. But what does that actually mean to me as an investor?
Segregated Funds offer three fairly distinctive advantages and disadvantages:
- Depending on the contract, 75% to 100% of the value of your investment is guaranteed, so long as you hold the funds for a specific length of time (Usually 10-15 years). This is typically called Maturity Guarantee.
Guaranteed Death Benefit
- Similar to maturity guarantee, 75% to 100% of the value of your investment is guaranteed upon death of the annuitant. In addition, there’s an extra bonus, if the funds are exposed to a deferred sales charge, there will be no penalties upon payout to beneficiaries
- Great option for business owners if there is a concern with creditors
- Considering this is an insurance contract, there are higher management fees than your average mutual fund
Catch to the Contract
- If you don’t fulfill the length of the contract, then the maturity guarantee becomes null and void
Limited Fund Options
- I wouldn’t consider this a deal breaker, but mutual funds tend to have more fund options. If you’re more risk averse, it won’t matter, but, if you’re a higher risk investor, then this might be concern
And there you have it folks. In the last 6 months, I have worked on 4 different estate cases where segregated funds were involved. Of the four, two specifically took advantage of the death benefit guarantee. That is, had the client put these funds into a mutual fund, the DSC fee to pay out to beneficiaries would have exceeded $10K. However, this was not the case and we were able to pay out the proceeds to the beneficiaries within 4 weeks.