Mutual Funds vs Segregated Funds: What’s the difference?

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Mutual Funds and Segregated Funds Illustration

Besides growth, most investors want security for their investments. A segregated fund is a type of fund that tends to offer both. In this article, we discuss what segregated funds are and how they differ from mutual funds. 

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What are Segregated Funds?

Segregated funds are an investment pool designed as a deferred variable annuity and are used by insurance companies to offer both capital appreciation and death benefits to policyholders. 

In other words, segregated funds help you to grow your investment, and insurance helps you to protect it.

A deferred variable annuity is an investment strategy that allows you to invest in securities, including stocks, bonds, and mutual funds without paying taxes on them until it is time for withdrawal.

What are Mutual Funds?

Mutual funds are an investment strategy that brings investors together with the sole purpose of pulling money from them and investing it in stocks, bonds, and other securities. 

We have a more elaborate article on this. Learn more about mutual funds.

Advantages of Segregated Funds

  • Segregated funds provide additional protection for your investments. Its policies include a maturity and death benefit guarantee, which ranges from 75% to 100% of your initial investments.
  • They protect your privacy in such a way that funds with a named beneficiary do not become part of the owner’s estate. Therefore, the proceeds are paid directly to the beneficiary. 
  • Segregated funds give your investment portfolios the potential to grow.

Disadvantages of Segregated Funds

  • Segregated funds keep your money locked in until the maturity date which means you are not allowed access to it. However, a fine is applicable, if you have to withdraw before maturity.
  • They always have higher management expense ratios. This is to cover insurance costs.

An expense ratio is the percentage of your investment that a fund charges every year to manage your invested money.

Differences between Segregated Funds and Mutual Funds

Segregated FundsMutual Funds
1.Your principal investment has a maturity or death benefit guarantee, depending on the level of protection you choose.There are no maturity or benefit guarantees on mutual funds.
2.In relation to your current age, segregated funds have a death benefit reset to protect your investment in case of premature death.Since mutual funds do not have maturity or death benefits, this is not an option.
3.They are life insurance contracts, which means your funds may be protected from creditors.Mutual funds do not protect you from creditors except in limited circumstances.

Are segregated funds more expensive than mutual funds?

Segregated Funds are more expensive than mutual funds, because of the cost of death and maturity benefits. Mutual funds do not have the insurance guarantees that apply to segregated funds and this makes them cheaper to purchase.

Is it safe to invest in segregated funds?

Yes, it is safe to invest in segregated funds as it comes with perks other investment plans do not offer such as security and insurance.

Bottom Line

Segregated Funds offer both capital appreciation and death benefits to policyholders. This makes them a great investment option. Even when the investor is dead, the beneficiary can get the money, as the insurance covers the investment.


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