2025 Guide: Segregated Funds vs Mutual Funds - Key Differences & Costs Explained
Explore the essential differences between segregated funds and mutual funds in 2025. Learn how these investment options compare in terms of protection, fees, and benefits to make informed financial decisions.
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Mutual funds have long been a favored investment vehicle for individuals seeking a straightforward, cost-effective way to diversify their portfolios across various assets. These funds pool investors' money to invest collectively, often managed either passively or actively to track or outperform specific market indices. On the other hand, segregated funds share similarities with mutual funds but come with distinct features that set them apart.
Shared Characteristics of Segregated and Mutual Funds
Both investment types involve pooling investors' capital into a collective fund, with professional managers making decisions about asset allocation and investment choices. Investors own a proportional interest in the fund's assets, while the managing institution retains legal ownership of the underlying investments.
Key Differences Between Segregated Funds and Mutual Funds
Segregated funds are unique in that they are insurance products offered by insurance companies, regulated under insurance laws rather than securities laws. This distinction brings added protections and features not typically found in mutual funds.
A major advantage of segregated funds is their built-in guarantees, often protecting 75% to 100% of the premiums paid, minus applicable fees, upon maturity or the policyholder's death. This safety net reduces the risk of losing the entire investment, unlike mutual funds where investors bear full market risk.
Additionally, segregated funds provide death benefits that usually pay beneficiaries the greater of the guaranteed amount or the current market value, offering enhanced estate planning benefits. Withdrawals are permitted during the contract term, but any guarantees adjust proportionally to reflect these changes.
Quick Insight
Segregated funds function as annuities with guaranteed returns influenced by contributions, withdrawals, and fund performance.
In contrast, mutual funds are subject to estate settlement processes upon the investor's death, which can delay payouts. Mutual funds are predominantly favored in the U.S., while segregated funds have greater popularity in Canada.
Despite their benefits, segregated funds typically incur higher management fees due to their insurance features and guarantees. For example, the RBC U.S. Equity GIF offers multiple series with expense ratios ranging from 1.89% to 3.16%, including potential sales charges for early redemption.
Comparatively, mutual funds like the Fidelity Large Cap Core Enhanced Index Fund (FLCEX) have lower expense ratios around 0.39%, with generally lower withdrawal fees depending on holding periods.
Correction—April 30, 2022: Previous versions of this article contained inaccuracies regarding fund terminology and fee structures.
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