Segregated funds were initially developed by the insurance industry to
compete against mutual funds. Today, many mutual fund companies are in
partnership with insurance companies to offer segregated funds to
investors. Segregated funds offer some unique benefits not available to
mutual fund investors.
Segregated funds offer the following major benefits that are not offered by the traditional mutual fund.
1. Segregated funds offer a guarantee of principal upon maturity of the
fund or upon the death of the investor. Thus, there is a 100 percent
guarantee on the investment at maturity or death (this may differ for
some funds), minus any withdrawals and management fees - even if the
market value of the investment has declined. Most segregated funds have
a maturity of 10 years after you initial investment.
2. Segregated funds offer creditor protection. If you go bankrupt, creditors cannot access your segregated fund.
3. Segregated funds avoid estate probate fees upon the death of the investor.
4. Segregated funds have a "freeze option" allowing investors to lock
in investment gains and thereby increase their investment guarantee.
This can be powerful strategy during volatile capital markets.
Segregated funds also offer the following less important benefits:
1. Segregated funds issue a T3 tax slip each year-end, which reports
all gains or losses from purchases and redemptions that were made by
the investor. This makes calculating your taxes very easy.
2. Segregated funds can serve as an "in trust account," which is useful
if you wish to give money to minor children, but with some strings
attached.
3. Segregated funds allocate their annual distributions on the basis of
how long an investor has invested in the fund during the year, not on
the basis of the number of units outstanding. With mutual funds, an
investor can invest in November and immediately incur a large tax bill
when a capital gain distribution is declared at year-end.
There has been a lot of marketing and publicity surrounding segregated
funds and how much value should be placed on their guarantee of
principle protection. In the entire mutual fund universe, there have
been only three very aggressive and specialized funds that lost money
during any 10-year period since 1980. Thus, the odds of losing money
after ten years are extremely low. If you decide you need a guarantee,
it can cost as much as 1/2 percent per year in additional fees.
However, with further market volatility these guarantees could be very
worthwhile. In addition, most major mutual fund companies also offer
segregated funds.
