UNDERSTANDING SEGREGATED FUNDS

Question: The other day, I read that some of the major mutual funds are now being sold as segregated funds. What are the advantages of segregated funds over mutual funds?

Answer: What are mutual funds?
Mutual funds offer investors the opportunity to pool their money with other Canadians who share the same investment objectives. Together, as unit holders in a mutual fund, they have the potential to achieve greater growth than they could individually. They offer individuals an opportunity to diversify their investments across a wide range of asset classes with relatively small investments.

Mutual funds are the most popular form of investment in Canada today. According to Investor Economics' 2003 annual industry review, Canadians had more than $400 billion invested in mutual funds at the end of 2002.

Mutual funds are most appropriate for investors who:

. are looking for potentially higher growth opportunities
. do not have immediate estate-planning concerns
. have a longer time horizon and,
. feel a capital guarantee on their initial investment isn't necessary

What are segregated funds?

Segregated funds are investment funds offered by insurance companies. Segregated funds, like mutual funds, pool investors' money together, under the direction of a team of professional investment managers to achieve growth. They're called segregated funds because the assets of these funds are kept separate from the life insurance company's other assets.

These types of investments provide opportunities for growth, while providing the benefits of death and maturity guarantees that will protect all or a portion of your principal investment. In addition, money invested in segregated funds may be protected against creditors and will bypass the estate and go directly to the appointed beneficiary upon death.

Segregated funds offer growth with added security. While the cost of the guarantees generally means segregated funds cost more than similar mutual funds, the added capital protection they provide is ideal for some investors.

According to Investor Economics' 2003 annual industry review, at the end of 2002 Canadians held $38.9 billion in segregated funds.

Segregated funds are most appropriate for investors who are:

. more conservative and attracted to a guarantee on the money they invest
. self-employed individuals and professionals who have a high degree of potential creditor and liability risks