Last updated: Mar-28-2017

    
 
UNDERSTANDING THE COST OF SEGREGATED FUNDS
3/28/2017 11:19:03 PM
HOME : FEATURES : QUESTION & ANSWER : UNDERSTANDING THE COST OF SEGREGATED FUNDS
Show Printable Version Download Plain Text
 
Fund Library Q&A
Your questions about financial planning, investments, and portfolio management answered by an industry expert



By Robyn K. Thompson  | Friday, December 09, 2016


Q – I’ve been researching mutual fund investments on the Fund Library site, and I’ve noticed that in many cases, the same fund is available as a “segregated” fund, but with a much higher management expense ratio. For example, CI Harbour Fund Class A has an MER of 2.44%, but has holdings identical to the CI Harbour Segregated Fund, which has an MER of 3.34%, but which also has generally lower returns. Could you explain the difference between the two types of funds and why seg funds have higher fees? – Margorie S., Toronto, Ontario

A – A mutual fund is basically a pool of money contributed by investors, each of whom holds units in the fund commensurate with the amount invested. The fund then invests the money in securities that may include stocks, bonds, and money market instruments. Mutual funds are regulated by provincial securities regulators and provide no guarantees of investment performance. They are best suited to people who want broad diversification in their investment portfolio. When you invest in mutual funds, you are willing to give up guarantees in return for potential of increased returns. The average Management Expense Ratio (MER) of a mutual funds is about 2%.

Segregated (“seg”) funds, on the other hand, are insurance products and are regulated by provincial life insurance legislation. Your premiums (net of fees) are invested in the segregated funds of an insurer, which, in turn, invests the money in such securities as stocks, bonds, and money market investments. Insurance companies often team up with mutual fund companies to provide a “branded” seg fund whose investments are identical to an existing mutual fund.

The twist is that the seg fund version provides a principal guarantee, typically between 75% and 100% of your principal at the end of a specific period of time, usually 10 years or at death. Seg funds also provide protection from creditors and avoid probate (because of their characteristics as an insurance policy), while mutual funds do not. Average MER for seg funds is much higher than for mutual funds, ranging between 2.5% and 6%, in order to pay for that insurance coverage.

While seg funds are more expensive than mutual funds, they do offer certain advantages over mutual funds – the principal guarantee, creditor protection, and probate avoidance mentioned above. The choice of investment vehicle really depends on your tolerance for risk. I recommend you speak to your investment advisor to determine if the seg fund guarantee is worth the offset in lower return.

If you are close to retirement, are concerned about market volatility, and are looking for guarantee of principal then perhaps some seg fund allocation might work for you. On the other hand if you are a between 35 and 50 and have a moderate risk tolerance, you might want to consider lower-cost mutual funds or exchange-traded funds (ETFs). – Robyn

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

© 2016 by the Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. Commission, trailing commissions, and other fees may apply to fund investments. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.

 
:: STOCK SEARCH
Find a Stock

(Leave blank for all)
Symbol   Name
:: MEMBER SERVICES
Username:
Password:
Forgot your password?
Register now
Tech Support
:: USEFUL LINKS
For general inquiries, please email the Librarian.
 
Home |  Features |  Member Services |  Tools |  Funds |  About Us
For any questions or problems with this site, please contact the Librarian.
Page ID: 20:80:1074:00016046:1/25/2017:2:51:57 PM Duration of this visit: 0 sec.