If you’ve made the decision to invest some of your money, you may be wondering which option will offer you the best bang for your buck. 2 of the most popular choices among investors are mutual funds and segregated fund policies.
What are mutual funds and segregated funds?
Mutual funds let investors pool their money together in a fund that’s managed by a qualified investment firm. It’s a process that diversifies your investments, potentially limiting your exposure to market fluctuations. For many people, it’s a very attractive investment option because it’s cost-effective and can be customized to your unique risk tolerance.
A segregated fund policy is similar – like mutual funds, there’s a pooling of investments. But unlike mutual funds, a segregated fund policy includes insurance guarantees that can protect much or even all your original investment. Let’s look at the advantages of mutual funds and segregated funds in more detail.
Advantages of mutual funds
Lower management expense ratios (MERs)
Mutual funds often have lower management expense ratios (MERs) because there are no guarantees on your investment. They’re usually more aggressive, growth-focused, and specialty funds are available. The management expense ratios and insurance that come with segregated funds can often be more expensive, which can be a disadvantage to some.
Variety of investment options
There are many different types of mutual funds, which means it’s possible to create an investment portfolio to match your specific risk tolerance. If you want to be more aggressive, there are growth-focused specialty funds available to help you. And if you want to take a more conservative approach, there are funds to match your tolerance for risk, too.
That means mutual funds are often the first type of investment a young person tries after they get their first job and begin making money. That said, the variety of mutual fund choices means someone who starts investing in mutual funds in their teens or twenties could continue investing in them – having updated their investment style to their changing risk tolerance – as time goes on and they enter new stages of life.
Team of experts
Mutual funds are managed by professional portfolio managers who buy the securities in the fund. They ensure the securities are in line with the fund’s investment objective—and yours. You can be confident your money is being managed by a team of professionals who have training and experience.
Advantages of segregated funds
Maturity and death benefit guarantees
One benefit of a segregated fund policy is that they include guarantees for your original investment. You can usually choose between 75% or 100%, so even if the market drops, you’ll get most or all your original investment back when your policy reaches its maturity date.
A segregated fund policy also comes with a death benefit guarantee. This means your named beneficiary (or beneficiaries) will receive either the market value of your investments or the guaranteed amount, whichever is higher at the time of your death. This makes segregated funds an excellent choice for individuals worried about how their assets will be passed on to their beneficiaries.
Resets to “lock in” your market gains
Segregated fund policies also offer you the ability to “lock in” your gains as part of the principal when you reach a maturity or death guarantee, for an additional fee. If your principle investment grows, then you could lock in at the new total, making this your new guaranteed amount.
This means that if you pass away or hold onto the fund until it reaches the maturity guarantee, you or your beneficiaries get the new total instead of the original amount.
Estate planning
As for estate planning, all segregated funds allow your beneficiaries to receive your money without having those funds flow through your estate. That means the money in your policy won’t be reduced by taxes and the fees associated with settling an estate. It also means your beneficiaries will get the money faster since segregated funds policies are usually paid out to beneficiaries within a few weeks of the paperwork being filed.
In comparison, you can also arrange to have your registered mutual funds' savings passed on to your beneficiaries when you die. If your beneficiary is your spouse, those savings will be transferred to them quickly, though other types of beneficiaries – such as friends or charities – may have to wait longer.
Creditor and liability protection
One difference between mutual funds and segregated fund policies is that the latter offers the potential for creditor and liability protections. That means your assets within a segregated fund policy, whether registered or non-registered, may be protected from creditors, where a specific type of beneficiary – like a spouse or a child – has been named. It also means that, in the event of your death, your assets may be passed onto your beneficiaries without being exposed to creditors.
In addition, with segregated funds policies, you may be less exposed to liabilities that could decrease your assets. With the liability protection available in a segregated fund policy, your assets in a segregated fund policy may be protected in the event a lawsuit is filed against you. Together, potential creditor and liability protection could make segregated fund policies an excellent choice for business owners.