The insurance industry came up with segregated funds as a way to compete with mutual funds. Today, a lot of mutual fund companies work with insurance companies to offer investors segregated funds. Investors in segregated funds can get some benefits that investors in mutual funds can't get.
Segregated funds have the following big advantages that traditional mutual funds don't have.
- Investors can be sure that they will get their money back when the fund ends or when the investor dies. So, the investment is guaranteed to be worth 100% at maturity or death (this may be different for some funds), minus any withdrawals and management fees, even if the investment's market value has gone down. Most segregated funds mature 10 years after you first put money into them.
- Investors who use segregated funds don't have to pay fees for probate when they die.
- Investors in segregated funds have a "freeze option" that lets them lock in their investment gains and make their investment more secure. During times when the stock market is volatile, this can be a very effective plan.
- Creditors are protected by separate funds. If you go bankrupt, your creditors won't be able to get to your segregated fund.
Other, less important benefits of segregated funds are:
- Separated funds can be used as a "in trust account," which is helpful if you want to give money to a minor, but there are some rules.
- At the end of the year, segregated funds send out a T3 tax slip that lists all of the investor's gains or losses from purchases and sales. This makes it very easy to figure out your taxes.
- The annual distributions of segregated funds are based on how long an investor has had money in the fund during the year, not on how many units are still in circulation. When a capital gain distribution is made at the end of the year, an investor who put money into a mutual fund in November will get a big tax bill.
There has been a lot of marketing and publicity about segregated funds and how much value should be put on their guarantee of principal protection. Since 1980, only three very risky and specialised funds have lost money over any 10-year period. So, there is a very small chance of losing money after ten years. If you decide you need a guarantee, you may have to pay extra fees of up to 1/2 percent per year.
But if the market gets even more unstable, these guarantees could be worth a lot. Also, most of the big companies that sell mutual funds also sell segregated funds.
