Segregated Funds vs Mutual Funds: Key Differences Explained

The main difference between segregated funds and mutual funds is that segregated funds offer principal protection on investments and these products are sold by insurance companies, unlike mutual funds which are sold by asset management companies or financial institutions.

Segregated Funds vs Mutual Funds

Fund Type Segregated Funds Mutual Funds
Principal Protection Segregated Funds offer principal protection of the investment and a predetermined appreciation amount based on specified conditions. Mutual funds take on market risk and there is no guarantee of returns or protection of principal investment.
Underlying Investment Segregated Funds might own financial securities or equivalent synthetic exposure to provide returns similar to benchmark indices. Mutual funds invest in a company’s shares in public equity markets and may employ the use of derivatives to optimize the return profile of the fund.
Seller Insurance Companies are primarily sellers of segregated funds. Asset management companies and financial institutions bring mutual funds to the market.
Fees As these products guarantee principal protection, fees are significantly higher than mutual funds. Fees are high for mutual funds in general as they are actively managed products,  but are lower when compared to segregated funds.
Estate Planning Proceeds pass on benefits to beneficiaries without creating any tax liability upon death of the holder. Proceeds pass onto the beneficiaries, but such beneficiaries will have to account for estate taxes for non-registered accounts. Mutual funds held in registered accounts will be able to pass on to beneficiaries without incurring any estate taxes.
Liability Protection Segregated funds offer potential liability protection from creditors in the event that specified beneficiaries (spouse/children) have been named. Mutual funds offer limited protection from personal liability from creditors.

Principal Protection

Segregated Funds provide a guarantee on the invested capital and create structures to ensure the principal is protected against losses.

Mutual funds can experience drawdowns and there is no principal protection.

Did You Know?

While Segregated Funds offer principal protection, there are different tiers of principal protection. Investors can choose between 100% protection to 25% protection (75% of the principal is at risk) to enhance the return/risk profile of their investment.

Underlying Investments

Segregated Funds are instruments that offer investment-like characteristics for an insurance product with underlying investments in several asset classes to facilitate the return of capital on maturity or death benefits payout to the beneficiaries.

Mutual funds invest in public equities and derivatives to build market exposure based on their investment mandate. 

Seller

Insurance Companies are primary issuers of segregated products as these products are essentially deferred variable annuities that incorporate market exposure and provide death benefits while mutual funds can be issued by a wide variety of financial institutions.

Fees

Associated fees with segregated funds are substantially higher than mutual funds as principal guaranteed products incur higher charges.

Estate Planning

Segregated Funds and Registered Mutual funds are great tools to pass along wealth.

However, any non-registered investments need to flow through the estate upon the death of the holder and will be subject to tax.

Liability Protection

Segregated Funds are generally exempt from bankruptcy and will protect the investor from creditor demands in the event that specified beneficiaries have been named, unlike mutual funds.

What is a Mutual Fund?

Mutual funds are vehicles to deploy investor capital pools based on the investment mandate and objectives outlined.

Mutual funds are professionally managed and have a higher fee structure to gain advantages through the fund manager’s discretionary decision-making.

Stacks of coin in increasing height with jar at end

What is a Segregated Fund?

Segregated Funds are products offered by insurance companies that will pay out the entire principal amount on the maturity or death of the insured party.

As a result, the investments made by segregated funds are less volatile and perform well enough to avoid principal drawdowns during the course of owning segregated funds.

Further, this product has a myriad tax benefits and provides liability protection.

Frequently Asked Questions

  • Which is better, mutual funds or segregated funds?
  • Are segregated funds more tax-efficient than mutual funds?
  • What are the advantages of Segregated Funds?

Sid Mohapatra is an energy trader based out of Toronto working in power and natural gas trading. Prior to working in commodities, Sid worked at a top Canadian bank’s fixed income and derivatives business. He possesses strong fundamentals in asset allocation, global macro thematic investing and physical commodities.

As a graduate of McMaster University, Sid specialized in Finance and has taught numerous sessions on Investing, Financial Securities and Trading courses. He led and managed the Horizon’s Trading Center at McMaster University.

Sid’s unique experience brings a breadth of institutional knowledge to the retail investing universe. He covers equity derivatives, structured credit instruments and tax harvesting techniques to help Canadians make better financial decisions in the ever-changing landscape of financial markets and investing.