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The term "Mutual Fund" is often
used to describe a wide variety of investment funds where the investment
capital from a large number of investors is "pooled" together and invested
in specific stocks, bonds, mortgages, etc. Canadian life insurance companies
have been the source of "Segregated Funds", the insurance companies' version
of Mutual Funds, with some similarities and many important differences.
Segregated funds are similar to mutual funds. Both offer investors an
opportunity to ‘grow’ their investment capital (the money they invest), and
provide access to professional fund management.
Segregated funds offer many of the same investment opportunities and
mandates provided by mutual funds but have one important difference --
segregated funds are insurance contracts known as individual variable
annuities and are, therefore, governed by the Insurance Act.
It is the insurance contract that provides a number of additional features
and benefits that are not available with mutual funds.
All segregated funds are not the same. What they do have in common is a
minimum 75% guarantee of initial investment capital at fund maturity or
death of policy holder. Very few segregated funds are unique in that they
have 100% guarantee of investment capital at fund maturity or death of
policy holder. There are very few segregated funds remaining with 100%
guarantees.
The basic differences between segregated funds and mutual funds are shown in
the following table, however, more important differences are revealed if you
read further.
| Benefit |
Seg Funds |
Mutual Funds |
| Maturity Guarantee |
Yes |
No |
| Death Guarantee |
Yes |
No |
| Creditor Proofing |
Yes |
No |
| Probate Protection |
Yes |
No |
| Insurance Protection |
Yes |
No |
Mutual funds are regulated under the provincial securities regulators and
segregated funds are regulated by the provincial insurance officials. Mutual
funds are offered through a prospectus filed with the provincial securities
commission and segregated funds are offered through an information folder.
Most mutual funds and segregated funds are available on a deferred sales
charge basis.
Like mutual funds, the segregated fund policy holder has no ownership rights
in the assets of the fund. They remain the property of the insurance
company. Segregated fund units and mutual fund shares are units of value,
where the policy holder owns an interest but not a piece of property.
According to the market value of a specified group of assets, the insurance
company must maintain separate funds with separate assets for each fund.
Segregated Funds are actually variable deferred annuity contracts with
insurance protection in the event of death. It is this insurance component
that brings together many of the benefits of segregated funds. At death,
proceeds of a segregated fund can pass directly to a named beneficiary, and
are not subject to creditor's claims, probate, lawyer's or executor's fees.
As long as a preferred beneficiary is designated, creditor protection exists
during the policy holder's lifetime even if a bankruptcy occurs. Mutual
funds don't have this protection, since, upon death, they become part of the
deceased's estate and are subject to taxes, legal, executor and probate
fees.
To the extent that the maturity and death guarantees of segregated funds are
applicable, these same amounts are insured up to $60,000 by CompCorp, the
insurance company protection association, when you have a segregated fund
investment with one of CompCorps member companies. If total benefits exceed
$60,000, CompCorp covers 85% of the promised benefits, but not less than
$60,000. Mutual Funds are not covered in like manner under CDIC, the
equivalent bank insurance coverage.
If you purchase non-registered mutual funds towards the end of a calendar
year, you could pay tax for a year's worth of capital gains even though you
did not own units for a whole year.
With segregated funds, income is allocated monthly so you don't have to pay
tax on gains that arose before you owned units.
Non-registered segregated funds have an additional tax advantage over mutual
funds. If a segregated fund loses capital in a given year, the unit holders
can claim the capital loss on their taxes and offset any capital gains made
on other investments. Taxation rules allow the allocation of capital gains
or losses without cashing in the units held. Mutual funds do not have the
ability to allocate. They distribute gains or losses and a loss cannot be
distributed. The only way to declare a loss with a mutual fund is to sell
the units held.
By making regular monthly contributions into segregated funds or mutual
funds you benefit from one of the greatest tools available to a long term
investor, dollar cost averaging.
Our Web Pages are under
constant revision and subject to change without notice. Due to the dynamic
nature of the mutual fund industry, we can make no guarantee as to the
accuracy of the information presented. Mutual fund values fluctuate daily.
The information contained
herein is for personal use only. Redistribution of this information is
prohibited without written permission.
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