The Advantages of Mutual Funds Over Segregated Funds
Segregated funds are a type of investment that is similar to a mutual fund, except that the segregated fund is offered by an insurance company. While these funds have become popular, mutual funds have several advantages over segregated funds. Before investing in a segregated fund, you should consider the advantages of traditional mutual funds.
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Lower Expense Ratios
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One benefit of investing in mutual funds over segregated funds is that you can save money on expenses. Both funds have expense ratios, which is an amount of money charged by the fund provider to cover expenses. The expense ratios of mutual funds typically are lower than those for segregated funds, because more work is required in the management of a segregated fund. These expenses can eat into your returns and make your investing less profitable.
No Unnecessary Guarantee
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With a segregated fund, investors get a certain amount of guarantee on their original investment. For example, they can be guaranteed at least 75 percent of their original investment if they hold it for at least 10 years. This sounds attractive, but you may have to pay more to get this guarantee. In addition, investments in mutual funds rarely pay less than the segregated fund guarantee, and over the long term, mutual funds typically are as safe as segregated funds.
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Different Rules
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Segregated funds and mutual funds are offered by different entities with different rules. Mutual funds are offered by mutual fund companies, which are regulated by the Securities Exchange Commission (SEC). Segregated funds are offered by insurance companies, which means the investment essentially is guaranteed by the insurance company. If the insurance company goes out of business, you could lose your investment in segregated funds.
Higher Returns
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Investing in a mutual fund typically provides higher returns than segregated funds. Segregated funds tend to invest in low-risk, low-return securities because of their guarantee of funds. Because mutual funds do not have a guarantee, they can invest in instruments such as stocks that provide higher returns. If you want higher returns and are willing to accept the higher risks, you may be more satisfied investing in a traditional mutual fund.
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