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. 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 >>
  3. 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 >>
  4. 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 >>
Related Articles
  1. Investing

    Segregated Funds: Investment Protection For Canadian Citizens

    These funds contain the best of all worlds, providing opportunities for market growth with a no-loss guarantee.
  2. Financial Advisor

    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.
  3. Financial Advisor

    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.
  4. Investing

    Mutual Funds Are Awesome - Except When They're Not

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

    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.
  6. Investing

    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.
  7. Financial Advisor

    How to Rate Your Mutual Fund Manager

    What to really look for when you're deciding on a mutual fund.
  8. Financial Advisor

    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.
  9. Investing

    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.
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. Pooled Funds

    Funds from many individual investors that are aggregated for ...
  6. Investment Fund

    A supply of capital belonging to numerous investors that is used ...
Hot Definitions
  1. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  2. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  3. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  4. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  5. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  6. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
Trading Center