Segregated Funds: The Pros and Cons

Segregated funds have started to become a more popular investment over the last few years. This type of investment is similar to mutual funds with a few differences. Here are a few pros and cons associated with the segregated fund.

Pros

Fans of the segregated fund will point to an investment guarantee as one of the biggest advantages that this type of investment has to offer. Segregated funds to carry with them a guarantee that will pay you back if you lose your initial investment. In most cases, they will offer 75% of what you originally paid into the investment. Therefore, if the investments in the fund go south, you will not have to worry about losing your money.

Another advantage that this type of fund gives you is the death benefit. If you are an investor in a segregated fund and you die, the company will return 75 to 100 percent of what you originally invested. They will pay this amount to a beneficiary that you choose. This provides you with a product that is similar to life insurance.

Another benefit that comes with investing in a segregated fund is that it is highly diversified. You are essentially pooling your funds together with many other investors in order to purchase securities. A fund manager will be in charge of making the individual investment decisions and buying diversified securities. Before, this can also significantly decrease the amount of risk associated with your investment.

Cons

Although you do have a guarantee on your investment, many would argue that this is an unnecessary guarantee. Many say that you are paying for something that you do not need. This guarantee is paid for by increasing the costs associated with being in the fund. When you consider the possibility that all of the individual investments that make up the fund become worthless, this does not seem very likely. You could invest in a mutual fund and it should always retain some sort of value because of the diversification. Therefore, many people overstate the importance of a guarantee on your initial investment.

This type of fund also tends to provide lower returns than other forms of investment. Since the management team have to choose investments that they are willing to guarantee the performance of, this limits their choices significantly. When you invest in safer securities, you will have to sacrifice some return. Therefore, you might be better off putting your money into a mutual fund that can invest in a wider array of securities.

Segregated funds also are notorious for costing investors more to get involved. The expense ratios are typically much higher than what you see with mutual funds and this will significantly cut into the amount of money that you can make. Therefore, when you combine low returns with high costs, you have an investment vehicle that has limited potential. These factors often work together to scare off potential investors.

blog comments powered by Disqus
Scottrade