Segregated Mutual Funds

A Unique Guarantee:
(based on the article "A Unique Guarantee" by Tom Ward, which appeared in the Times Colonist).

Tom Ward of Shoreline Financial Services Ltd., in Victoria, says that the "best kept secret in the investment market is segregated funds!" Specifically, investors that have been hesitant to purchase mutual funds, because they are worried about risking capital, should consider segregated funds. These are investment funds administered by life insurance companies, and sold by licensed life brokers and agents. They are funds similar to open-end mutual funds, with some important differences:

• Seg funds (as they are sometimes called) are part of an insurance contract called a deferred annuity. They must guarantee a return of at least 75% at a specified maturity date, which is typically 10 years from the date of deposit. Most funds today guarantee 100% return on death or maturity.
• Even if the market slumps at the time of your death, your beneficiaries or estate will receive 100 percent of your capital - or more, if the fund has appreciated. This is what makes these funds ideal alternatives for anyone uncomfortable with mutual funds that have no guarantees.
• Segregated funds are creditor proof if a beneficiary is designated other than the estate
• Segregated funds are exempt from probate fees, as the beneficiaries receive the funds directly from the insurance company.

A unique feature offered by some segregated funds is that the principal amount is re-evaluated at various intervals. As an example, if your principal balance were to grow from $100,000 to $165,000 following a 10-year guarantee period, you would be sure to receive not less than $165,000 regardless of the then-current market value. But, there are important similarities between mutual funds and seg funds, and a few key ones are:

• seg funds can hold a broad range of assets from money-market holdings to aggressive emerging-market equities.
• They can be traced in the financial section of the daily newspaper, under the heading Segregated Funds, and now most are valued daily.
• seg funds can be converted to an annuity or a RRIF (registered retirement income fund). Segregated funds, like mutual funds, can be purchased with or without sales charges, and can be started with as little as $25 a month.

Some segregated fund managers, have made associations with some of the larger companies that manage mutual funds - thus benefiting from these firms' considerable investment expertise. The fact the principal is guaranteed, gives many people the confidence to invest in these funds. In addition, these funds may be of a low-risk nature, or higher-risk. Many investors appreciate this - especially in the current period of stock market volatility - because it enables them to choose precisely how aggressive they would like to be.