Mutual funds or segregated funds?

Both have their advantages but one may fit your situation better.

If you’ve made the decision to invest some of your money, you may be wondering which financial vehicle will offer you the best bang for your buck. Two of the most popular choices among investors are mutual funds and segregated fund policies.

What are mutual funds and segregated funds?

Mutual funds let investors pool their money together in a fund that’s managed by a qualified investment firm. It’s a process that diversifies your investments, potentially limiting your exposure to market fluctuations. For many people, it’s a very attractive investment option because it’s cost-effective and can be tailored to your unique risk tolerance.

A segregated fund policy is similar – like mutual funds, there’s a pooling of investments. But unlike mutual funds, a segregated fund policy includes insurance guarantees that can protect much or even all of your original investment.

Now, let’s look at the advantages of mutual funds and segregated funds in more detail.

Advantages of mutual funds

Lower fees

Mutual funds don’t have the insurance guarantees segregated funds have, but that’s why they’re considerably cheaper to acquire. The management and insurance fees that come with segregated fund policies tend to make them more expensive than mutual funds. For this reason, mutual funds may be the better choice for some individuals.

Diversity of investment options

There are many, many different types of mutual funds, which means it’s possible to create an investment package to match your specific risk tolerance. If you want to be more aggressive, there are growth-focused specialty funds available to help you. And if you want to take a more conservative approach, there are funds to match your tolerance for risk, too.

That means mutual funds are often the first type of investment a young person tries after they get their first job and begin making money. That said, the incredible variety of mutual fund choices means someone who starts investing in mutual funds in their teens or twenties could continue investing in them – having adapted their investment style to their evolving risk tolerance – as time goes on and they enter new stages of life.

Advantages of segregated funds

Maturity and death benefit guarantees

One benefit of a segregated fund policy is that they include guarantees to your original investment. You can typically choose between 75% or 100%, so even if the market dips, you’ll get most or all of your original investment back when your policy reaches its maturity date.

A segregated fund policy also comes with a death benefit guarantee. This means your named beneficiary (or beneficiaries) will receive either the market value of your investments or the guaranteed amount, whichever happens to be higher at the time of your death, making segregated funds an excellent choice for individuals concerned about how their assets will be passed on to their named beneficiaries.

Resets to “lock in” your market gains

Segregated fund policies also offer you the ability to “lock in” your gains as part of the principal when you reach either a maturity or death guarantee, for an additional fee. If your principle investment grows, then you could lock in at the new total, making this your new guaranteed amount.

This means that, if you pass away or hold onto the fund until it reaches the maturity guarantee, you or your named beneficiaries get the new total instead of the original amount.

Estate planning

As for estate planning, all segregated funds allow your named beneficiaries to receive your money without having those funds flow through your estate. That means the money in your policy won’t be reduced by taxes and the fees associated with settling an estate. It also means your named beneficiaries will get the money faster, since segregated funds policies are usually paid out to named beneficiaries within a few weeks of the paperwork being filed.

In comparison, you can also arrange to have your registered mutual funds savings passed on to your named beneficiaries when you die. If your named beneficiary is your spouse, those savings will be transferred to them quickly, though other types of named beneficiaries – such as friends or charitable organizations – may have to wait longer. Footnote 1

Creditor and liability protection

One difference between mutual funds and segregated fund policies is that the latter offer the potential for creditor and liability protections. That means your assets within a segregated fund policy, whether registered or non-registered, may be protected from creditors, where a specific type of beneficiary – like a spouse or a child – has been named. It also means that, in the event of your death, your assets may be passed onto your named beneficiaries without being exposed to creditors. Footnote 2

In addition, with segregated funds policies, you may be less exposed to liabilities that could erode your assets. With the liability protection available in a segregated fund policy, your assets in a segregated fund policy may be protected in the event a lawsuit is filed against you. Together, potential creditor and liability protection could make segregated fund policies an excellent choice for business owners. Footnote 3

Speak with your financial security advisor and investment representative

Both mutual funds and segregated funds have their distinct advantages, but everyone has their own set of financial goals. To find out more about which of these types of funds meet your financial needs for today and the future, speak with a financial security advisor and investment representative with Freedom 55 Financial and Quadrus Investment Services Ltd.


That said, should you choose a registered mutual fund or segregated fund policy, as opposed to a non-registered one, you can pass funds on to your named beneficiaries without having them go through your estate.
Mutual funds in an RRSP may have certain protections in some provinces. Speak with a financial security advisor to learn more.
Creditor protection depends on court decisions and applicable legislation, which can be subject to change and can vary from each province; as such, it can never be guaranteed. You should talk to your lawyer to find out more about the potential for creditor protection in your specific situation.