How do segregated funds differ from mutual funds?

By Albert Phung AAA
A:

Mutual funds are investment vehicles that many investors have embraced as a simple and relatively inexpensive method for investing in a variety of assets. Segregated funds are similar to mutual funds, but they possess some key differences.

On the surface, both investment vehicles represent a collective pool of funds that investors pays into. Another party makes the decisions regarding asset allocation and other investment-related choices. Furthermore, all financial assets within each fund are still owned by the organization that is managing the pool of investments, while investors own an interest of the assets.

However, this is more or less where the similarities end. Segregated funds are considered to be insurance products sold by insurance companies and, as a result, the governing bodies and regulations responsible for overseeing segregated funds are usually the same ones that cover insurance companies.

Another fundamental difference between segregated funds and mutual funds is that segregated funds generally offer a degree of protection against investment losses. For example, most segregated funds will guarantee around 75-100% of premiums paid (minus management and other related costs) in the event of maturity or the policy holder's death. This differs from mutual funds because in the unlikely event that all of the underlying stocks that make up a mutual fund become worthless, investors stand to lose all of their invested assets.

Segregated funds also have some other benefits relating to the death benefit portion of their policies. Beneficiaries of the policy will usually directly receive the greater of the guarantee death benefit or the market value of the fundholder's share. With a mutual fund, on the other hand, the market value of the asset is subjected to the same estate-related processes that other assets go through, which means it may take some time before any parties receive a payout.

In spite of their advantages, segregated funds are not without drawbacks. Due to all the extra bells and whistles that segregated funds offer, fees tend to be higher (on average) than mutual funds. Also, due to the guarantee against losses, segregated funds tend to be more restrictive about their choices for investments, leading to more modest returns.

To learn more about mutual funds, see Mutual Fund Basics, The ABCs Of Mutual Fund Classes and Advantages Of Mutual Funds

RELATED FAQS

  1. What is the minimum amount of money that I can invest in a mutual fund?

    Learn about investing in mutual funds even with a smaller initial investment; there are many funds available to investors ...
  2. What does a mutual fund's beta coefficient measure?

    Evaluate the risk associated with a particular mutual fund by determining its beta coefficient, which illustrates the fund's ...
  3. How can I get a mutual fund prospectus?

    Read and understand the prospectus before investing in a mutual fund. You can obtain a copy from the fund company, your financial ...
  4. Can I purchase mutual funds for my IRA?

    Learn how to invest your IRA assets in mutual funds. Discover a few of the different types of mutual funds available for ...
RELATED TERMS
  1. Historic Pricing

    A method for calculating the value of an asset using the last ...
  2. Bear Fund

    A mutual fund designed to provide higher returns when the market ...
  3. Ulcer Index - UI

    An indicator developed by Peter G. Martin and Byron B. McCann ...
  4. Investment Company Act Of 1940

    Created in 1940 through an act of Congress, this piece of legislation ...
  5. Product Portfolio

    Investopedia explains: A Product Portfolio is the collection ...
  6. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
Related Articles
  1. How Does Janus's Fund Lineup Look Now?
    Investing Basics

    How Does Janus's Fund Lineup Look Now?

  2. Thank You, Pimco: BlackRock Drops Bond-Fund ...
    Investing Basics

    Thank You, Pimco: BlackRock Drops Bond-Fund ...

  3. What Bill Gross's Arrival Means To Janus ...
    Mutual Funds & ETFs

    What Bill Gross's Arrival Means To Janus ...

  4. The Key Differences Between ETFs And ...
    Investing Basics

    The Key Differences Between ETFs And ...

  5. 5 Things You Need To Know About Index ...
    Investing Basics

    5 Things You Need To Know About Index ...

Trading Center