Segregated Funds vs Mutual Funds: What Are The Similarities & The Differences?

Are you looking for a solid investment vehicle to invest your wealth in? Congratulations on reaching Money Reverie!

If you are in the market for a new investment or just racking your brain on how to grow your current investment… then you should consider what type of fund is best suited to you.

One of the most common choices for investors is whether to invest in segregated funds vs mutual funds.

Although segregated funds and mutual funds share some similarities in choosing between the two investment options… there are a number of key differences to keep in mind on your investment journey.

Both have their pros and cons, and it’s important to weigh these factors carefully prior to making a decision.

In this blog post, I bring my personal experience to bear in helping you make the best decision between segregated funds and mutual funds.

Let’s begin by first understanding what segregated funds vs mutual funds are all about.

What are Mutual Funds?

A mutual fund is a form of investment vehicle with a pool of funds from many investors. It invests in securities such as bonds, stocks, market instruments besides other assets.

Professional wealth managers operate mutual funds. They allocate investments and attempt to generate capital profits or dividends for investors.

The portfolio of a mutual fund aims to meet the investment objectives specified in the prospectus.

Mutual funds provide access to professionally run investments. This includes equities, stocks, bonds, and other assets to small and individual investors.

As a result, each shareholder shares in the fund’s profits and losses.

Mutual funds invest in a wide range of securities. Their value is being measured by the fund’s overall market capitalization. The combined value of the fundamental portfolios determine that.
The mutual fund company’s valuation is being determined by the success of the securities it purchases.

As a result, when you purchase a mutual fund unit or share, you are purchasing the portfolio’s performance or a portion of the portfolio’s worth.

A mutual fund usually provides three types of returns to investors. These are:

  1. If the value of the fund’s holdings rises, but the fund manager does not sell them, the value of the fund’s securities rises.
  2. Interest on bonds and dividends on securities invested in the fund’s portfolio. A fund distributes almost all of the profits it earns over the course of a year to its shareholders. Investors are often given the option of receiving a check for dividends. And the option of reinvesting the proceeds to obtain further securities.
  3. The fund gets a capital benefit if it purchases shares that have risen in value. Most funds often distribute this income to investors.

Mutual Funds Advantages

Here are the major advantages of mutual funds:

Lower Fees

Mutual funds don’t offer insurance guarantees as segregated funds, but they’re far less expensive to buy.

Variety of Investment Options

Since mutual funds come in a variety of forms, you can tailor an investment portfolio to suit your risk profile.

There are growth-oriented funds that will assist you if you decide to be more aggressive.

There are also funds that complement your risk profile if you choose to adopt a more conservative path.

Advanced Portfolio Management

You pay a low management fee as part of the cost of purchasing a mutual fund, which is often used to employ a professional portfolio manager.

Dividend Reinvestment

Once the fund’s interest and other dividends income streams are being declared… they can use them to buy more mutual fund securities, expanding your investment.

Mutual Funds Disadvantages

Here are the major disadvantages of mutual funds:

High Sales Charges and Expense Ratios

Fees minimize the total return on investment. Mutual fund sales charges and expense ratios can quickly get out of control if you don’t pay attention.

Investing in funds with expense ratio levels greater than 1.20% should apply caution since they are on the higher end of the cost spectrum.

Also, you need to be cautious of 12b-1 advertising charges and general sales charges.

Tax Inefficiency

Whether you want it or not, you do not have an option on capital income distributions in mutual funds.

You may collect returns from the investment that is uncontrollable taxable due to profits, losses, redemptions, and turnover in security over the year.

Management Abuses

If a mutual fund manager abuses their responsibilities, attrition, churning, and window dressing might occur.

For example, calculations may not involve some trading. This also includes substitution, and losers selling before the quarter-end to balance the accounts.

Poor Trade Execution

You’ll get the same closing price NAV on your purchase or sale on the mutual fund if you position your mutual fund prior to the cut-off period for same-day NAV.

Mutual funds have a poor execution plan for investors searching for quick execution periods, which may be due to limited investing horizons, market timing or day trading.

What is a Segregated Fund?

Segregated funds (also known as seg funds) are a form of investment vehicle that Canadian insurance providers often use to manage single and multiple annuity insurance plans.

Segregated funds pool the money of all investors in the funds including individual and group deposits. 

These deposits build a pool of money in which the segregated fund manager invests based on the kind of fund established. 

For example, the money invested in a bond fund is being utilized to invest in bonds by the fund’s manager.

Individual investors can choose from a variety of segregated funds offered by insurers based on their investment objectives.

A segregated fund provides both life insurance benefits and investment capital growth.

Because of the increasingly complex nature of segregated funds, the total expense ratio is slightly high.

Segregated funds are often devoid of aggressive investment injections. As a result, fund returns are typically modest.

Segregated funds are not available for purchase on the public market. They being are organized as contracts that do not take possession in the form of units or shares into account.

Funds deposited in segregated accounts are being held until they mature. The maturity varies based on the investment objective and product terms.

Offerings of segregated funds differ significantly in terms of objectives and fundamental investment options.

Capital growth is being achieved by investment in the funds up to a given maturity period. Additionally, they provide a death payout if the owner expires before the plan matures.

Segregated funds are more often provided by life insurance agencies such as Equitable Life of Canada, Sun Life, Empires Life, Royal Bank of Canada, Industrial Alliance and Alliance Financial Group.

Segregated Funds Advantages

Here are the major advantages of segregated funds:

Benefits and Guarantees

Based on the degree of protection you select, your principal investment is being guaranteed a maturity or a death benefit of 75% to 100%

Volatility Protection

Although market fluctuations can affect segregated funds, you’re covered by your maturity and death payment guarantees.

Automatic Resets

Segregated funds come with a death payment reset based on the age of purchase and the level of guarantee in the case of premature death.

Estate Planning

In terms of estate planning, segregated funds permit your beneficiaries to collect funds without involving your estate. This ensures that the funds in the plan are not taxed, plus the money involved with an estate settlement.

Creditor Protection

Life insurance policies are part of segregated accounts. Your assets enjoy coverage by creditors if you name a family member as the beneficiary in the case of a bankruptcy or dispute.

Segregated Funds Disadvantages

Here are the major disadvantages of segregated funds:

Early Withdrawal Penalties

You’ll almost certainly have to pay a penalty if you exit from the investment before the maturity date, besides losing any guarantee on principal or death payment.

Expensive Fees

Segregated funds come with higher investment management expense ratios (MER). The reason lies in the fact that the insurance features cost is being covered by the fees.

Also, if the fund is being purchased or sold, you may pay commission.

Limited Liquidity

Accessing your capital is not advisable unless you want to take a risk by receiving it at the current value, which may result in a loss.

There’s even the possibility of charging you a penalty.

Segregated Funds vs Mutual Funds: Similarities and Differences

FeaturesSegregated FundsMutual Funds
Diversification and money growthYesYes
Professional portfolio managementYesYes
Principal guaranteeYesNo
Estate planning benefitsYesOccasionally
Potential creditor protection for registered accountsYesYes
Potential creditor protection for non-registered accountsYesNo
Lock in gains through a resetYesNo


Segregated funds vs mutual funds are all investment instruments. They are being used to fund TFSA’s, RRSPs, LIFs, LIRAs, RIFs, among other products.

In general, you can redeem your segregated funds and mutual funds at any point for their current market value. Furthermore, the entity that manages the pool of investments owns all capital assets within each portfolio, with investors owning interest.

Both segregated funds vs mutual funds possess funds units for trading.

They both require a professional portfolio manager to guarantee that the funds receive a fair return. On the other hand, segregated vs mutual funds have several differences. Let’s face them.

Only life insurance firms sell segregated funds, which are the asset of the insurance provider and the investor’s trust. On the other hand, mutual funds are being managed by a corporation or a trust.

That ensures you’re covered by the insurance company’s insolvency.

Upon investment losses, maturity, or death, segregated funds guarantee all or a portion of the principal invested. Mutual funds, in general, have no guarantee.

Many segregated funds, for example, guarantee a return of nothing less than 75% to 100% of the premiums charged. A mutual fund investor runs the risk of losing the whole investment.

Since segregated funds are also life insurance plans, they provide other advantages related to the death payout as part of their policies. The market value or guaranteed death payout of the fund shareholder is normally paid directly to the policy’s beneficiaries.

Segregated funds are being held until the contract reaches maturity. This makes them perfect for long-term investment objectives.
Consequently, segregated funds tend to restrict distribution or liquidation durations from the portfolio. They also charge a fee when a transaction takes place prior to maturity.

Moreover, segregated funds also have higher fees and less flexibility compared to mutual funds.

Segregated Funds vs Mutual Funds: Which is Right for You?

Now that you’ve learned about the fundamental differences and similarities between segregated funds and mutual funds, how do you choose the one that is right for you?

Below are the three factors I consider critical when deciding a suitable investment vehicle between segregated funds vs mutual funds:

1. Identify Your Investment Objective

The first step to deciding whether to invest in segregated funds or mutual funds is to identify your investment objective.

Is it more valuable to you to make long-term capital profits or short-term profits? Can you use the funds to save for education or to save for an anticipated retirement?
If you have a long-term investment objective, you can consider segregated funds. This is because they are not touch until the contract reaches maturity.

2. Consider Your Risk Tolerance

Next, you need to consider your risk tolerance.  Are you willing to tolerate large fluctuations in your portfolio’s value? Or, is it better to make a more conservative or lower-risk investment?

Since cost and return go hand-in-hand, you must weigh your appetite for profits against your risk tolerance.

Remember, with segregated funds; you may have a guarantee of at least 75% to 100% of your premium. With mutual funds, you have a 0% guarantee.

3. Know Your Budget

Finally, your choice between segregated funds and mutual funds should boil down to your budget.

Do you have savings or emergency funds to sustain you depending on the maturity of your investment? Or, are you battling with a heavy debt that prevents you from investing much of your income?

Understanding how much you can commit to your investment will help you determine whether to go for segregated funds or mutual funds.

You should bear in mind that when it comes to the cost, segregated funds are more costly than mutual funds because of management and insurance costs.

Over To You

When it comes to your financial future, like most people, you’re looking for a guaranteed way to make money.

You don’t want to waste time picking vehicles that may not succeed. You need a reliable investment vehicle that gives you more control over what you are investing in.

Segregated funds vs mutual funds are two popular investment vehicles out there you need to consider.

Even though they share some similarities, segregated funds and mutual funds have several differences that you must understand before committing to one over the other.

Depending on your investment objective, risk tolerance and budget, you can make the best of your money by investing in either segregated funds or mutual funds. You can even invest in both. The choice is yours!

If you have any questions or concerns on segregated funds vs mutual funds, kindly let me know in the comment section.

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