What is a Mutual Fund?

A mutual fund is a type of financial vehicle where the money collected from investors gets pooled and invested in a combination of stocks, bonds, money market instruments, commodities, cash investment strategies and other assets. Mutual funds have become a popular way for the general public to participate in the stock market while lowering their risk. 

Mutual funds are operated by professional money managers, who strategically allocate the fund’s assets to produce higher capital gains or income for the fund’s investors compared to what they would have received if they put their money in a regular savings account. Mutual funds can be bought from any bank, credit union and other investment companies.

Types of Mutual Funds

Investors have several choices when it comes to mutual funds, and the risk associated with each fund will vary. For this reason it is important that you know the risk and the

investment purpose of each fund so that you can make proper investment decisions. In general,

mutual funds fall into 1 of the 4 major categories:

  1. Money Market Funds – These are considered relatively low risk.
  2. Bond Funds – These buy different government and/or corporate bonds.
  3. Equity Funds – These buy shares in companies.
  4. Balanced Funds – These hold a mix of stocks and bonds.

Equity funds are quite popular, offering a wide range of funds, which can be identified by 4 main categories:

  1. Growth Funds – These focus more on capital appreciation.
  2. Value Funds – These focus more on stocks that are deemed to be undervalued in price and likely to pay regular dividends.
  3. Index Funds – These aim to achieve returns similar to a particular index such as the S&P 500.
  4. Sector Funds – These focus on a particular industry segment such as biotech, energy, real estate, emerging markets, etc.

If you are interested in investing in the stock market but you lack the knowledge to invest yourself, mutual funds are a good way to get your feet wet. You can invest in mutual funds with very little money to start (as little as $50 per month), and the best part is, it can give you access to diversified, professionally managed portfolios at a low price..

However, as with any business, running a mutual fund involves costs and the costs for managing the funds are passed along to the investors in the form of fees. The fees vary from fund to fund and are usually correlated to the rate of return. The funds that have higher rates of return usually have higher fees because they perform better than the low-cost funds. 

Investors should always read the Fund Facts to see what the objectives of the fund are, its risk profile, and the fees and expenses it charges. The fund’s simplified prospectus also contains information about risks, fees, and charges.

What is a Segregated Fund?

A Segregated Fund, also referred to as an individual variable insurance contract, is an investment vehicle that combines a life insurance coverage with investments such as mutual

Funds and portfolio funds. Segregated Funds typically have an investment guarantee that promises that the client will receive a portion of their initial investment regardless of the fund performance. The percentage guarantee is usually 75% or 100% of the principal amount invested. 

In the past, Segregated Funds usually require larger investment amounts so only investors with larger amounts to invest could buy these funds. However, now you can open a Segregated Fund with as little as $500 or $50 per month. Because there’s an insurance component of segregated funds, the management fees are usually higher than their mutual funds or portfolio funds counterparts. Also, they’re not available through banks and regular investment companies, they can only be accessed through insurance companies. 

To capitalize on the segregated fund investment guarantee, the funds must be invested for a fixed period of time — usually for 15 years. However, the investment guarantee can be reset up to twice each year, depending on the company, to lock in fund growth. But of course there is no free lunch in life, so while you’re allowed to reset your principal guarantee, each time you reset the guarantee period gets reset as well.  

Unlike mutual funds, segregated funds may also provide protection from creditors. This is because it is usually considered an insurance product so it has some similar characteristics like the death benefit from a life insurance — bypassing the estate and potentially probate taxes since it goes directly to the preferred beneficiary.

Mutual Funds Vs Segregated Funds

The table below shows some comparison between mutual funds and segregated funds

Mutual Funds

Segregated Funds

Can invest as little as $25 per month

Can invest lumpsum of $500 or $50 per month 

No principal guarantee

Principal guarantee

Lower fund fees 

Higher fund fees

Cannot lock in growth

Can lock in growth

No creditor protection

Creditor protection

Cannot bypass probate

Can bypass probate (100% death benefit guaranteed)

Can use for  TFSA and RRSP

Can use for TFSA and RRSP

The old adage, “It takes money to make money”, is not always true when it comes to investing in some mutual funds because they allow first time investors with limited amounts of money to invest. This gives them a chance to make higher returns by pooling their small monthly investments with other investors to create large funds that the fund manager can use to capitalize on more lucrative opportunities than if the investments were small.

I don’t consider a mutual fund or a segregated fund to be a better investment than the other, because both have pros and cons. It all depends on what you’re trying to achieve and the amount of money that you have to invest.  

Buying into mutual funds or segregated funds can be a way to lessen your risk when learning to invest. But one of the first things to do is to research both, then talk to a professional advisor who knows their stuff, and can financially educate you about both types of fund. The professional advisor you choose should be able to answer any and all questions you have regarding the funds that interest you.

Now, you are not going to blindly hand over your money to some stranger, however. So, when you find a fund you are interested in make sure you know and understand everything about the fund and the fees involved – some may have front-loaded while others back-loaded fees — before you decide to put your hard earned cash down on the table. 

This should just be common sense but I have fallen victim to investing in a mutual fund before because I just trusted the advice of my financial advisor, and I consider myself perfectly sane. 😁

Plus I’ve seen other perfectly sane people make poor investment decisions because they refuse to listen. You invest to make some money, not to throw it away or lose it to some scheister, so always do your due diligence before you sign on the dotted lines.