What's the Difference Between SEG Funds and Mutual Funds? Canadian Finance
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Let’s dive into it…
What is a Mutual Fund?
What is a Segregated Fund?
Advantages and Disadvantages of both
How does this affect Georgia?
How does this affect you?
But first…
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Mutual Funds:
Mutual funds are a type of investment vehicle that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other assets.
The goal of a mutual fund is to provide investors with access to a professionally managed portfolio of investments that would be difficult or expensive to build on their own.
Mutual funds are typically managed by investment professionals who make decisions about which assets to buy and sell based on the fund's investment objectives.
Mutual funds can be actively managed, meaning that the investment professionals actively trade assets in an attempt to outperform the market, or they can be passively managed, meaning that they simply track the performance of a particular index or benchmark.
When an investor buys shares in a mutual fund, they are essentially buying a small piece of the overall portfolio.
The value of the investor's shares will increase or decrease based on the performance of the underlying assets.
One of the main advantages of mutual funds is their diversification.
This is because mutual funds invest in a variety of different assets, and the risk of any one asset negatively impacting the overall portfolio is reduced.
This can help to reduce overall portfolio risk and volatility.
Another advantage of mutual funds is their accessibility.
Mutual funds can be purchased through a variety of different channels, including through us, CC& Associates, banks, of course, or online brokerages.
They are very convenient and an easy way for individual investors to access the benefits of a professionally managed portfolio.
However, mutual funds do come with some fees, including management fees and other expenses that can eat into returns.
It's important for investors to carefully consider the fees associated with a particular mutual fund before investing, as these fees can vary widely and can have a significant impact on overall returns
Segregated Funds:
Segregated funds, also known as seg funds, are a type of investment product that combines the growth potential of a mutual fund with the security of an insurance contract.
Segregated funds are offered by life insurance companies in Canada and are similar to mutual funds in that they invest in a diversified portfolio of stocks, bonds, or other assets.
However, segregated funds differ from mutual funds in a few key ways.
First, segregated funds are insurance products, which means they come with some guarantees that mutual funds do not offer.
Many segregated funds offer a death benefit guarantee, which means that if the policyholder dies before the maturity date of the fund, their beneficiaries will receive a minimum payout, regardless of the performance of the underlying investments.
In addition to the death benefit guarantee, segregated funds may also offer other types of guarantees, such as a maturity guarantee or a market value guarantee.
Maturity Guarantee can be defined as providing a minimum guaranteed payout to investors at the end of a specified period, typically between 10 and 15 years.
The guarantee ensures that the investor will receive a certain percentage of their initial investment, regardless of how the underlying investments have performed.
Market Value Guarantee can be defined as providing a minimum guaranteed value to investors at the end of a specified period, typically between 10 and 15 years. The guarantee ensures that the investor will receive a certain percentage of the highest value that their investment has achieved during the guarantee period, regardless of how the underlying investments have performed at maturity.
These guarantees can provide additional security to investors, but they also come with higher fees than mutual funds.
Another key difference between segregated funds and mutual funds is that segregated funds are protected from creditors in the event of bankruptcy.
This means that if the insurance company that offers the segregated fund were to go bankrupt, the investor's money would be protected and would not be at risk.
Segregated funds played a key part in my friend, Georgia’s beneficiaries
Georgia had saved her entire life and had over $400.000 put away in a non-registered account.
When she passed away unexpectedly, her beneficiaries were expecting to have to prove Georgia’s death with a Will, a probated Will, a Letter of Direction, and Proof of being the Executor, as this had happened before except it was in the form of a mutual fund.
However, because of Georgia's extremely good financial planning, the $400,000 was non-registered money located in a segregated fund.
Therefore, when Georgia passed, her two beneficiaries were each given a cheque for $200,000, no questions asked.
The best part? They did not pay probate, it did not have to go through her estate, and the funds went directly to her beneficiaries within a few weeks of her passing.
These are the benefits of segregated funds. Although the management fees are higher, they pay off for the beneficiary in the form of an easy payout.
Georgia’s beneficiaries were extremely thrilled to hear this as their past experience with mutual funds kept the money held up by the estate for more than 3 months and they had to pay probate to release the funds.
This story is not to say segregated funds are better than mutual funds. It is only to show one benefit and how it paid off.
Which one best suits you?
It’s important to consult a financial advisor (Us - We can help) before you decide whether or not to move forward with a mutual fund or a seg fund.
At CC&Associates, we will take an in-depth look at your goals, risk tolerance, risk capacity, and overall personality to determine which fund to move forward with.
Overall, segregated funds can be a good option for those who are looking for a mix of growth potential and security.
However, it's important to carefully consider the fees and guarantees associated with segregated funds before investing, as they can be more expensive than other types of investment products.
Due to the nature of Mutual Funds, it can be considered a relatively easy way to invest in a diversified portfolio of stocks, bonds, or other securities that is run by an investment portfolio expert.
However, an individual who invests in Mutual Funds must be willing to accept the risks associated with investing in the stock market, as mutual funds can go up or down in value depending on the performance of the underlying securities.
It is also important to understand that Mutual Funds are a long-term investment and are generally best suited for investors with a time horizon of at least 3-5 years.