Segregated Funds
What are segregated funds and how do they differ from traditional mutual funds?
A seg fund is actually an insurance contract with two parts: an investment that produces the return and an insurance policy that covers the risk. The seg fund is like a mutual fund,because you are investing in the same pool other people are investing to share investment gains. But because segregated funds are issued by Insurance companies, there is a guarantee attached that protects the investor's principal from sudden market declines. They are like a mutual fund with a safety net.
A built-in guarantee
Insurance companies are required by law to build added protection into investment products. Seg fund policies guarantee that most of your initial investment is protected in the event of death or at the time of maturity. Depending on the provider, this guarantee may vary from 75 to 100 per cent of the principal amount.
For example, if you invested $50,000 in a 10-year seg fund policy with a 75 per cent guarantee, you would receive your initial investment plus profits made from market gains at the time of maturity. However, If the value of the seg fund policy has fallen below $50,000 at maturity, the principal will not be less than $37,500, but if the guarantee was 100%, then your investment would be fully protected. You can periodically "lock in" the protection on the principal when the policy has escalated in value. This resets your 10-year guarantee period.
Like mutual funds, segregated funds contain a diversified group of solid investments. They come in various sizes and asset mixes, and benefit from the experience of qualified portfolio managers. Where the two types of funds are different is in flexibility and the added cost of insuring the principal, which varies depending on the insurance company, as well as, the higher management expense ratio (MER) charged by segregated funds.
Segregated fund advantages
some advantages are:
