Segregated funds
were initially developed by the insurance industry to compete against mutual
funds. Today, many mutual fund companies are in partnership with insurance
companies to offer segregated funds to investors. Segregated funds offer some
unique benefits not available to mutual fund investors.
Segregated funds
offer the following benefits that are not offered by the traditional mutual
fund.
1. Segregated
funds offer a guarantee of principal upon maturity of the fund or upon the
death of the investor. Thus, there is a guarantee on the investment at maturity
or death (this may differ for some funds), minus any withdrawals and management
fees - even if the market value of the investment has declined. Most segregated
funds have a maturity of 10 years after your initial investment.
2. Segregated funds
offer creditor protection. If you go bankrupt, creditors cannot access your
segregated fund.
3. Segregated
funds avoid estate probate fees upon the death of the investor.
4. Segregated
funds have a "freeze option" allowing investors to lock in investment
gains and thereby increase their investment guarantee. This can be a powerful
strategy during volatile capital markets.
Segregated funds
also offer the following less important benefits:
1. Segregated
funds issue a T3 tax slip each year-end, which reports all gains or losses from
purchases and redemptions that were made by the investor. This makes
calculating your taxes very easy.
2. Segregated
funds can serve as an "in trust account," which is useful if you wish
to give money to minor children, but with some strings attached.
3. Segregated
funds allocate their annual distributions on the basis of how long an investor
has invested in the fund during the year, not on the basis of the number of
units outstanding. With mutual funds, an investor can invest in November and
immediately incur a large tax bill when a capital gain distribution is declared
at year-end.
There has been a
lot of marketing and publicity surrounding segregated funds and how much value
should be placed on their guarantee of principal protection. In the entire
mutual fund universe, there have been only three very aggressive and
specialized funds that lost money during any 10-year period since 1980. Thus,
the odds of losing money after ten years are extremely low. If you decide you
need a guarantee, it can cost as much as 1/2 percent per year in additional
fees.
However, with
further market volatility these guarantees could be very worthwhile. In
addition, most major mutual fund companies also offer segregated funds.
Disclaimer:
This article is presented solely as an example and is not meant to replace qualified
financial advice. If you or someone you know require up to date financial or
legal help please seek qualified assistance. No content on this site should
ever be used as a substitute for direct legal advice from your lawyer or a qualified attorney.
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