What’s the Deal with a Segregated Fund Investment?

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Often times when we think of investing we ask ourselves a few questions like where and what to invest in. Should it be stocks, bonds, mutual funds, segregated funds or simply stay with a GIC cash investment? Of course your safest bet is staying with a GIC, but that has its limitations of a low interest rate payout due to its security. As you would remember from previous reading “Risk is equal to return”. So while investing in a GIC creates safety it lacks the return you need to keep pace with inflation.

Most individuals would like to invest but want a guarantee of principal more than anything else in the world, where can you find such an investment that gives you a reasonable return but also protects your capital.

Let us examine the pros and cons of a Segregated Fund herein after called a Seg fund. First off, a Seg fund is sold by an insurance company which offers you the opportunity of investment growth but with added insurance protection. Let’s say you invest $20,000 in a Seg fund, over the duration of the contract, your investment may fluctuate in value but it has a built in guarantee (insurance) that at time of maturity or death your principal is assured. Any investment with a principal guarantee is an attractive option; however this benefit comes at a cost. Also your principal is not guaranteed before maturity so you may receive less that the amount invested should you redeem prior to maturity.

Most investments will pay the value of the investment at time of death; a Seg fund on the other hand will pay according to contract stipulation, so you may have 100% of your funds passed on to your beneficiaries. Further to that, Seg funds allow you to name a beneficiary which means the proceeds are not subject to probate or probate fees as they pass directly to your beneficiaries!

Another great feature of investing in a Seg Fund is the fact that it can provide potential creditor protection. This is important to business owners who need to make sure that funds can be protected.

So why aren’t more people investing in Seg funds over Mutual Funds, well simply this, all those benefits don’t come for free. The main reason is that the cost or MER is usually higher than in mutual funds; therefore your investments need to perform at a much higher level to get a good net rate of return. The MER or fees are higher because you are paying for the guarantee of principal.

Segregated funds actually mirror mutual funds, or mutual funds are the underlying instruments. This means that the investment is identical, except for the fact that there is insurance on the Seg Fund, it is sold by an insurance company and by licensed life insurance agents.

Your dilemma is whether to buy a Seg or a Mutual Fund. If you are at the bank and the representative suggests a mutual fund, it might be worth your while to discuss with your financial advisor the merit and application of a Seg Fund especially if you are saving for your retirement.

The benefits even though positive must be weighed against the MER to be able to determine a positive return. If you are concerned about the amount of fees your advisor is earning then investing in a Seg fund puts you in a position where the fees are higher and Seg funds do not follow the disclosure rules as do mutual funds.  In any event though, investors are willing to pay for quality, if you receive quality advice and good service and good returns from your investments, then fees should not be the focal point.

Talk to your financial advisor about your investment performance, his fees and whether a Seg or Mutual fund is better for you.


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