As investors, we are always looking for the perfect balance between risk and reward, and there are several investment options to help you achieve this goal. Let’s look at two of the most popular alternatives: mutual funds and segregated funds.
Mutual Funds
A mutual fund is an investment product. With mutual funds, investors pool their money into a fund that is managed by a professional fund manager. The manager uses the combined money to buy a collection of investments. There is a management fee, but for most investors the fee is worth it, as their investment risk is spread out amongst a diverse set of investments. Investors also benefit from the manager’s experience and access to market information.
Segregated Funds
Even though it performs like an investment product, a segregated fund is considered to be an insurance product. With segregated funds, investors still pool their money into a fund, and that fund is professionally managed. Like mutual funds, the management fees are offset by the value of diversification and the manager’s investment expertise. The management fees for segregated funds can be higher than they are for mutual funds, but there are advantages that can make these higher fees worthwhile.
Mutual Funds – Pros and Cons
Because you’re not paying for insurance guarantees, mutual funds are generally cheaper to purchase than segregated funds. Plus, there are many mutual funds and risk levels to choose from, which makes mutual funds appealing to a wide range of investors, regardless of their risk tolerance.
However, while mutual funds have historically produced attractive returns, they are not guaranteed to make money for investors. Also, estate planning can be tricky with some types of mutual funds, which can be subject to estate taxes and fees.
Segregated Funds – Pros and Cons
Compared to mutual funds, segregated funds can have higher management fees, but there are many benefits too. A segregated fund policy includes a guaranteed investment amount, usually 75% or 100% of your original investment. Even if your investment value drops, you’ll receive the guaranteed amount when the policy reaches maturity. Segregated fund policies also feature a death benefit guarantee, meaning that you can name a beneficiary to receive the market value or guaranteed value of the policy, whichever is higher at the time of death.
You can also lock in your investment gains with resets when your policy reaches a maturity or death guarantee. You do pay a fee for your reset, but your guaranteed investment amount will be reset to the new, higher investment value.
In addition, segregated funds allow money to flow through to your named beneficiary without being part of your estate. This means that your policy may not be subject to estate taxes or fees. Segregated funds may also offer some creditor and liability protection.
At Sterling Advisory, we can help you choose the best fund option for your situation. Contact us today for more information.