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. Some unique benefits that are not available to mutual fund investors are offered by segregated funds.
These are the major benefits that are not offered by the traditional mutual fund but are offered by segregated funds.
A guarantee of principal upon maturity of the fund or upon the death of the investor is offered by segregated funds. This means that even if the market value of the investment has declined, there is a 100% guarantee on the investment at maturity or death, though this may differ for some funds, minus any withdrawals and management fees. Having a maturity of 10 years after your initial investment are most segregated funds.
Segregated funds also offer creditor protection. If you go bankrupt, then creditors won’t be able to access your segregated fund.
Estate probate fees are avoided by segregatd funds upon the death of the investor.
A “frozen option” which allows investors to lock in investment gains is what segregated funds have and this can increase their investment guarantee. During volatile capital markets, this can be a powerful strategy.
Segregated funds also offer the following less important benefits:
A T3 tax slip each year-end is issued by segregated funds and this reports all gains or losses from purchases and redemptions that were made by the investor. This makes calculating your taxes very easy.
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.
The basis of how long an investor has invested in the fund during the year is where segregated funds allocate their annual distributions on instead of the basis of the number of units outstanding. Because of mutual funds, an investor can immediately incur a large tax bill when a capital gain distribution is declared at year-end if they invest in November.
A lot of marketing and publicity has been surrounding segregated funds as well as how much value should be placed on their guarantee of principle protection. During any 10-year period since 1980, there have only been three very aggressive and specialized funds that lost money in the entire mutual fund universe. This means that there are extremely low chances that you will be losing money after 10 years. It can cost as much as percent per year in additional fees if you decide you need a guarantee.
But these guarantees can be very worthwhile with further market volatility. Don’t forget that most major mutual fund companies also offer segregated funds.