We talked about mutual funds in our last video.
This time, let’s learn about segregated funds, which are like mutual funds except the principal investment is guaranteed. This is a lesser known product to it’s more popular cousin, the mutual fund. In the latest Street Smarts with Taayla video, we talk about segregated funds, their key differences to mutual funds, and why you could choose one type of investment over the other.
An investment with protection
Segregated funds contain many of the same elements of a mutual fund; stocks, bonds, and other financial instruments. They’re held as a single investment fund and managed by a portfolio manager at a professional investment company.
As the holder of a segregated fund contract, you are able to take advantage of a diverse portfolio of investment options that you would be unlikely to get on your own.
Segregated funds are an insurance product
For some segregated funds, a mutual fund is the underlying investment. The use of the fund is given to an insurance company and converted to a “seg fund.” Depending on the contract and the fund, the guaranteed return of principal upon maturity is normally 75% and could go up to 100%.
As an example, if you invested $100,000 into a segregated fund and at the end of the maturity period the market value is $50,000, the guarantee means you can collect $75,000 or $100,000. If the market value is $120,000, you would receive $120,000.
Guaranteed death benefit
This fund also has a death benefit of paying out the principal investment to the designated beneficiary without penalty if the investor dies before the contract lock-in period expires.
If the balance of the account is higher than than principal investment, the beneficiary would receive that amount. Again, the benefit payout depends on the contracted guarantee return; sometimes this is 75% but 100% is most common.
Segregated funds also skip the probate process and won’t incur any fees related to the settling of an estate.
Many funds also allow for a “reset option”. If in time your initial investment has increased, you may have the option to realize those gains by locking the new value as your principal investment. We recommend caution in using this option, as resetting the investment amount may also mean resetting the contract to a new 10 to 15-year term. The contract period is important only if you’re waiting to collect the 75% or 100% guaranteed principal.
Another bonus with segregated funds is creditor protection. Depending on the circumstances of how the contract was purchased, investment in a segregated fund could be excluded from bankruptcy filings. The beneficiary of the fund has to be a spouse or your child to qualify for creditor protection. Also, the Canada Revenue Agency can seek to overturn this protection under limited circumstances.
The primary downside to segregated funds as an investment is the higher management fees because of the guaranteed investment.
Contact me or your registered advisor for a comparison of fees and risk to help you decide if a segregated fund is the best fit for your investment goals. Leave a comment below and tell me about your financial or investment questions. If you live in British Columbia, and have a question about this topic or on other financial matters, you can connect directly with me via email.
This content was prepared by Taayla Mark, a Financial Advisor with Engrace Financial Solutions Inc. This information has been obtained from sources we believe are reliable but is not guaranteed and may be incomplete.
Please note the information contained herein is not tailored to any one individual and is general in nature. For specific recommendation please consult directly with Taayla Mark.