Segregated funds
Segregated funds (also known as seg funds) are a type of investment vehicle that combines the features of both insurance and investment products, providing investors with a unique way to invest in the market while offering protection against market downturns. Segregated funds offer certain guarantees to the policyholder such as protection/refund of capital upon death (sometimes on maturity as well). As these funds are a powerful combination of investment and insurance they provide the growth potential of a mutual fund with the security of a life insurance policy.
Segregated funds are similar to mutual funds in that they pool money from multiple investors to invest in a portfolio of assets, such as stocks, bonds, and other securities. However, segregated funds differ from mutual funds in that they are issued by insurance companies and offer a form of insurance protection.
When you invest in a segregated fund, your money is invested in a portfolio of assets that is managed by a professional fund manager. The difference is that your investment is held in a separate account that is segregated from the general assets of the insurance company. This means that if the insurance company were to go bankrupt, your investment would be protected, and you would receive a portion of your investment back. Similar to mutual funds, the value of the segregated fund fluctuates according to the market value of the underlying securities.
Benefits of Segregated Funds
Segregated funds provide some unique features and benefits due to the fact that they are an insurance product and delivered through an insurance contract. These include:
- Possible creditor protection to their policy owner: Laws may protect a segregated fund policy in the event of bankruptcy or other action by creditors.
- Probate is bypassed: As the beneficiaries are named, in the event of death of the policyholder, the fund value is directly handed over to the named beneficiary bypassing probate.
- Guarantees provide a benefit on death and at contract maturity: Segregated fund policies provide guarantees of either 75% or 100% of the premiums paid on maturity or death of the policyholder or the current policy value whichever is higher.
- Reset options: A reset option allows the contract holder to lock in investment gains if the market value of a segregated fund contract increases.
- Tax benefit when capital losses are incurred.
- Assuris protection against insolvency of the insurer.
Some of the advantages segregated funds share with other fund investments are:
- There are a variety of funds
- Ease of investment
- Information readily available on funds before and after purchase
- Diversification provided
- Managed professionally
- Provides liquidity
- Ease of switching between funds
- Ease of redemption
- Ability to create an income stream from account value.
How Segregated Funds Differ from Mutual Funds
The main difference between segregated funds and mutual funds is the insurance protection that segregated funds offer. Mutual funds are not insured, and the value of your investment can fluctuate with market conditions. Segregated funds, on the other hand, offer some form of protection against market volatility and the risk of loss (in form of reset options and guarantees).
Another difference is the fees associated with segregated funds. As mentioned earlier, segregated funds typically have higher fees compared to mutual funds because of the additional costs associated with the insurance protection they offer.
Is Segregated Funds Right for You?
Segregated funds may be a suitable investment option for some investors, particularly those who are looking for an investment vehicle that offers both growth potential and downside protection. However, it’s essential to consider your investment goals, risk tolerance, and financial situation before investing in segregated funds. Additionally, it’s important to compare the fees and features of different segregated funds to find the one that best meets your needs.
In conclusion, segregated funds are a unique investment option that combines the features of both insurance and investment products. While they offer some form of protection against market volatility and the risk of loss, they also come with higher fees compared to mutual funds. It’s important to carefully consider the benefits and disadvantages of segregated funds and consult with a financial advisor to determine if they are a suitable investment option for your portfolio.