LEARN THE DIFFERENCE: MUTUAL VS. SEGREGATED FUNDS
A segregated investment fund (also called a Guaranteed Investment Fund or GIF) is commonly thought of as a mutual fund, which is only partially correct. A segregated fund is actually an insurance contract with two parts:
- a mutual fund that provides an opportunity for investment income and growth, and
- an insurance policy that covers certain aspects of potential capital losses.
The segregated investment fund is similar to a mutual fund because investors are pooling their money with 3D man Questionsother people to invest. As a result, life insurance companies distribute segregated funds with a guarantee attached to the investment that protects the investor’s principal from sudden market declines.
The main difference between segregated and mutual funds is in the ownership. The investor has no ownership of the assets held by the investment fund. They do not receive shares or units of the fund, but rather their investment is evidenced in the form of an insurance contract.
Segregated fund contracts were initially offered by the Canadian insurance industry in 1961. Traditionally, segregated investment funds were sold and managed by insurance companies. More recently, the segregated funds contract has evolved to where mutual fund corporations and financial institutions offer their own versions of segregated funds. These are typically referred to as Guaranteed or Protected funds and they are available in registered and non-registered forms and a wide range of asset allocations.
Typically, the new versions market existing mutual funds and then marry them to an insurance guarantee rather than creating a new category of mutual funds. So a guaranteed investment is just a traditional mutual fund plus an insurance wrapper.
Because the segregated funds contain insurance benefits, their management expense ratios (MERs) are higher than those for regular mutual funds. According to The Investment Funds Institute of Canada (IFIC) (May 12, 2010), funds offering principal or income guarantees will add a further 0.50% – 1.00% to the MER, depending upon the guarantee. According to the IFIC, in Canada the MERs for segregated funds generally range between 2.75% and 3.50%, per year.
Segregated funds are popular with investors that desire the potential investment gains promised by stock markets but who are concerned about preserving their investment capital.
~ Article provided by: www.investingforme.com, a resource for Canadian investors