What Is A Segregated Fund In Canada? Your Guide

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What is a segregated fund in Canada
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What is a segregated fund? Is it only available in Canada? Where can you buy it?

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What Is A Segregated Fund In Canada?

A segregated fund in Canada is a type of investment offered by insurance companies. You might have heard about mutual funds in Canada, and a segregated fund is very similar. It has similar benefits in that your investments are diversified into many different companies when you invest in a mutual fund, and that there is a fund management team taking care of the daily buys and sells for you. Being that segregated funds in Canada are offered by insurance companies, they do come with some additional benefits to protect your investment, which we will talk about in this article!

Segregated funds are a good idea for people who want to participate in the growth of the stock market, but who are also wary of the risks, and want to have a way to protect themselves against the worst-case scenarios by using certain stop-loss mechanisms. These protections do come with some costs, so it’s important that you work with the right advisor to help you determine whether or not segregated funds are the right choice for you.

How do segregated funds work?

Segregated fund work almost exactly like mutual funds on a surface level. You can think of a segregated fund like a mutual fund in that it is a basket of stocks being managed by a team of professionals, with the added features of an “insurance wrapper”.

At its core, segregated funds are a very specialized type of investment product offered by insurance companies called “individual varied insurance contracts”, or IVIC. They are called this way because when you invest money into a segregated fund, you’re actually entering into a type of insurance contract with the insurance company, in which they will offer you guaranteed values on your investment. Yes, that’s right. Segregated funds in Canada come with guarantees on the values, meaning that you won’t be completely at the mercy of the stock market. Instead, you’ll have an idea of the maximum amount you stand to lose.

For the cost of this protection, the management fee(something we talked about in our mutual fund article), will be slightly higher. Compared to a mutual fund, the management fee on segregated funds are usually about 0.5% to 1% higher.

Are segregated funds a good idea?

Segregated funds can be a good idea for a wide range of investors. Segregated funds in Canada come with a variety of benefits that make them a good idea if you want to manage investment risk, bypass probate upon death, and have access to a wide range of investment options in the market. Most important, it comes with different levels of guarantees that protect you from having losing too much money!

What is the meaning of segregated funds?

The meaning of segregated funds mean the invested funds are held separately from the insurance companies actual investment funds. This is a big legal benefit, because behind the scenes, segregated funds in Canada are considered an insurance product. As an insurance product, you are legally entitled to certain benefits which are not present in a typical investment on the market.

For a Canadian who invests in segregated funds, this means they can potentially have better peace of mind, knowing that their investments are better protected than if they were just to invest in a mutual fund.

What is the difference between a mutual fund and a segregated fund?

There are a few key differences between a mutual fund and segregated fund. We know that on a surface level, segregated funds are invested and managed like mutual funds. However, segregated funds in Canada enhance mutual funds by adding some insurance wrappers around it. Here are the key differences which a segregated fund adds on top of a mutual fund:

1. Maturity guarantees

Maturity guarantees on your principle. By investing into a segregated fund, you actually get to choose your guarantee level. The most common ones are 75% or 100%. There are also time horizons on this guarantee which can be 10 years, 15 years, or even to age 100. At the time of maturity, they would look at the market value of the contract. If the market value is lower than the guarantee value, the insurance company would actually “top-up” your investment.

2. Death benefit guarantee

For a lot of these segregated funds, they come with a death benefit guarantee, also have 75% or 100%. If you pass away while the segregated fund is still invested, the insurance company will top the value back up to your chosen guarantee level and cut a cheque to your chosen beneficiary.

3. Bypass probate

Segregated funds are an insurance product at it’s core, which means it will bypass the lengthy and potentially costly probate process when the investor passes away. This makes it a great option for older people in retirement who are concerned about their estate as their eventual time of passing.

4. Additional management fees

These extra benefits are paid for in the form of a management fee. A segregated fund will typically have higher management fees than a comparable mutual fund.

Can you withdraw from segregated funds?

Yes, you can withdraw from a segregated fund in Canada. There are some things to look out for, because sometimes, a segregated fund offers a limited number of withdraws per year. Or you might need to withdraw a minimum amount for each transaction. Each of these factors will be different, so make sure your advisor goes through this information with you before you decide to invest your money into a segregated fund!

FAQ

Segregated funds are a good idea for individuals looking to for some form of principal protection on their money and looking to pass their non-registered money to certain beneficiaries and bypass probate.

You can withdraw from segregated funds at any time. Keep in mind that the principle protection feature may not apply and you will receive only the market value of the fund.

The difference between segregated funds and mutual funds is that segregated funds are sold by insurance companies and come with principal protection features with additional fees whereas mutual funds are sold by banks and investment companies with no principle protection features. 

TFSA is NOT a segregated fund. TFSA is an investment account and segregated funds are investment products that can be held in a TFSA.

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Written by:

Jim Pan, CFP, MFA-P

Jim is a dedicated, fee and advice only independent Certified Financial Planner with a focus on supporting healthcare business owners during their crucial growth phase. His expertise lies in offering comprehensive solutions to minimize taxes while embracing a holistic approach. With a career spanning back to 2010, Jim has established a strong presence in the financial industry. He proudly holds a range of designations, including Certified Financial Planner (CFP), and Master Financial Advisor - Philanthropy (MFA-P). He is currently pursuing additional designations and qualifications to better serve his clients and community. Beyond his qualifications, Jim is a member and an esteemed participant in the Million Dollar Round Table (MDRT), an exclusive global association comprising the top 1% of financial advisors. Jim's commitment extends to the community, where he spearheads numerous charitable fundraising events and plays an active role in enhancing the well-being of others. Additionally, he has contributed significantly by serving on the board of the Canadian Mental Health Association in Vancouver. Currently, he volunteers with Junior Achievement of British Columbia (JABC) to present personal finance topics to youths.

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