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. How do I calculate the loan-to-value ratio using Excel?

    Learn what a mutual fund and a money market fund are, and understand the differences between each and how they serve various ... Read Answer >>
  2. How do I judge a mutual fund's performance?

    Evaluate mutual fund performance utilizing resources such as Morningstar; compare the fund with others in its peer group ... Read Answer >>
  3. How much of a company's stock can a mutual fund own?

    There is no written rule that stipulates how much of a company a mutual fund can own. Instead, there are two major factors ... Read Answer >>
  4. Can mutual funds invest in hedge funds?

    Learn about mutual fund portfolio management techniques and mutual funds' ability to invest in hedge funds, as well as new ... Read Answer >>
  5. Why is it that when investors realize returns on a mutual fund, its price tends to ...

    Mutual funds have been in existence since 1924, when the first open-ended mutual fund was created. Since then, the market ... Read Answer >>
  6. Why don't mutual funds trade like stocks?

    Learn how mutual funds differ from exchange-traded funds (ETFs) in how they are traded. Also, learn what fees are involved ... Read Answer >>
Related Articles
  1. Mutual Funds & ETFs

    A Mutual Funds Guide for Young Investors

    Learn how mutual funds work, why they are so popular and how younger investors can get started by putting mutual funds in their IRAs or 401(k)s.
  2. Investing

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
  3. Mutual Funds & ETFs

    Mutual Funds Are Awesome - Except When They're Not

    This investment is very popular, but that doesn't mean it comes without risk.
  4. Investing Basics

    4 Mistakes to Avoid When Choosing Mutual Funds to Invest in

    Mutual funds are a great way to build wealth but not all of them are the same. Investors have to be mindful of fees, turnover, redundancy and performance.
  5. Mutual Funds & ETFs

    Trading Mutual Funds For Beginners

    Learn about the basics of trading and investing in mutual funds. Understand how the fees charged by mutual funds can impact the performance of an investment.
  6. Investing

    How to Rate Your Mutual Fund Manager

    What to really look for when you're deciding on a mutual fund.
  7. Mutual Funds & ETFs

    5 Secrets You Didn’t Know About Mutual Funds

    Learn five of the "secrets" about mutual funds that can have a significant impact on mutual fund choices and investor profitability.
  8. Mutual Funds & ETFs

    The Benefits of Picking Mutual Funds Over Individual Stocks

    Learn about the advantages of investing in mutual funds rather than individual stocks, including the benefits of affordability, oversight and diversification.
  9. Mutual Funds & ETFs

    Trading Mutual Funds for a Living: Is It Possible?

    Find out why trading mutual funds for a living isn't your best bet, including how funds discourage short-term trading and which options may better serve you.
  10. Mutual Funds & ETFs

    When To Buy A Mutual Fund

    There is money to be made in mutual funds, but investors fall into several pitfalls that keep them from maximizing their profits. Read these tips to take the uncertainty out of investing in mutual ...
RELATED TERMS
  1. Segregated Fund

    A type of pool investment that is similar to a mutual fund, but ...
  2. Segregation

    Segregation is the separation of an individual or group of individuals ...
  3. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
  4. Maturity Guarantee

    The dollar amount of a contract (such as a life insurance policy ...
  5. Fund Of Funds

    A mutual fund that invests in other mutual funds. This method ...
  6. Fund Supermarkets

    An investment firm or brokerage that offers investors a wide ...
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center