The Money Management Newsletter: Investing in Mutual Funds
What about segregated funds?

By The Money Mangement Editor
Money Management Newsletter - April 2004

Segregated funds offer several differences over traditional mutual funds and should be considered by investors who need the comfort that they provide. Similar to mutual funds segregated funds are investment funds that pool together the assets of investors with similar objectives who want to diversify their investments, reduce their risk and lower their investment costs. Also, like mutual funds, segregated funds are professionally managed, come with a variety of payment options and can be easily tracked in the media. But because segregated funds are considered to be life insurance products, they can offer additional benefits that traditionally come with insurance contracts.

Ask yourself the following questions to see if segregated funds might be of benefit to you:

• Are you a business owner, self-employed or a business professional?
• Are you over the age of 50?
• Are you concerned about preserving your assets for your heirs and reducing estate or probate fees?
• Are you interested in borrowing outside of your RRSP?

Business owners and professionals

If a business owner or professional is involved in a lawsuit or bankruptcy, their segregated funds have a better chance than a traditional mutual fund of being excluded from any settlement with creditors. There is no guarantee that the use of a segregated fund will shield investments from creditor actions as each court case will be judged on its own merits. However if proof can be provided, to the satisfaction of the court, that segregated fund purchases were not made to avoid pending creditor claims or a looming bankruptcy and if there is a specified family member as a beneficiary, there is a greater chance that the segregated fund assets will be excluded from any settlement. Even if an individual stands to lose his or her business assets, personal investments may be spared.

Investors over age 50

Segregated funds give older investors access to the capital markets with some protection.
With interest rates still relatively low, more and more seniors are recognizing they should have some money invested in equities to ensure their investment savings will last. Yet, because they have a shorter investment horizon, they are often uncomfortable with any loss in their portfolio as they don't have the recovery time available to recoup a significant decline in their assets. The fact that segregated funds offer a guarantee of the invested capital and the ability to reset the guarantee as the investments go up in value may be great comfort to the older investor. The capital guarantee can range from 70% to 100% so check the fund's Information Folder for details. Naturally there is a cost for the guarantee in the form of higher management fees and most capital guarantees don't kick in until 10 years after the initial investment or most recent reset but the extra cost may be worth it for those with shorter investment horizons.

Seniors who are wish to preserve assets for their heirs and reduce estate costs

The death benefit guarantee* that is offered by a segregated fund may be particularly important for seniors because it is effective immediately. Even if they should die during a market downturn the full amount of their original invested capital may be eligible for their beneficiary, regardless of how much the investment has actually declined in value. Not all segregated funds offer a 100% death benefit so it is important that you consult the Information Folder of any fund that you are interested in to determine what is available. This benefit will also increase the cost of running the fund over a traditional mutual fund but again if the need is there the cost may be worth it. As well, estate costs can be reduced because a segregated fund allows the owner to designate a beneficiary. Upon the death of the annuitant the death benefit of the fund can be paid out directly to the beneficiary outside of probate thus reducing estate costs.

Borrowing

If you are considering borrowing to invest outside of your RRSP, segregated funds are an excellent choice because of their powerful guarantees. The capital and death benefit guarantees will provide comfort to an investor who uses leverage (borrowed money) to try and maximize gains by providing a safety net that if used properly, will prevent the undesirable situation of investments that are worth only a fraction of the loan used to purchase them.

To learn more about segregated funds and how reset guarantees work, just call your independent life agent. Segregated funds come with an Information Folder that should be carefully examined before any purchases are made.

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