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What are the pros and cons of investing in segregated funds?

Segregated funds are much the same as a mutual fund, but with some life insurance wrinkles.

They are actually an insurance policy. At the maturity date, 10 years after you bought it or on your death, typically 75 or 100 per cent of what you invested -- the principal -- is guaranteed. That percentage depends on the policy.You can get your money out without waiting the 10 years, though the guarantee may not be in place in that case. Some segregated funds let you "reset" the 10-year clock as often as four times a year. You would use that feature to lock-in or guarantee any gains you have made.

Example:   You invest $50,000 in the fund in 2000. Five years later, in 2005, your investment has grown by 50 per cent to $75,000. You could reset the 10-year clock, and, if the guarantee was for 100 per cent of the investment's principal, you would guarantee yourself that new $75,000 value.

The downside of segregated funds is that you can expect to pay a higher management expense ratio (MER) to buy that added protection. The MER includes the fees you pay a money manager to decide where to invest your money. It is calculated as a percentage of the total value of the assets in a mutual fund or a segregated fund.

Segregated funds can give protection from creditors, if the policy names an immediate family member as beneficiary. This may be particularly useful if you are self-employed. That protection may be lost if a court found you had set up the seg fund to avoid your debts. If you die, the beneficiary would get that asset without your province imposing probate fees. Seg funds are eligible as an RRSP investment. Insurance companies have offered segregated funds for many years, and typically managed them under their own names. Segregated funds are also offered under the "name brands" of some well-known mutual fund companies. So you can buy segregated versions of funds managed by companies like Trimark, CI Mutual Funds, BPI, Altamira, Sceptre and Mackenzie. You are guaranteed your principal. For that added protection, of course, you have a higher MER than the person who instead bought the ordinary mutual fund version. Depending on the policy, the maturity guarantee may be reduced to 80 percent or some other percentage once you reach age 90. You can't buy some of these policies after you turn 80. Segregated funds are a product which may appeal to cautious investors who want exposure to stock markets without the risk of losing their capital. Of course, a guarantee on most or all of your principal and maintaining or adding to your purchasing power are not the same thing. If your seg fund loses value, a guarantee on all of the principal means the real value of your money has declined because of inflation. Before putting your money in any investment, consider getting advice from an investment professional. A security which is right for one investor might not be the best choice for your needs