In today’s financial landscape, traditional savings methods are not offering the returns they once did.
With Savings Accounts currently hovering around 1% and the average yield for Government of Canada marketable bonds between 1 to 3 years standing at 4.64%, many are left wondering where to find low-risk, high-yield investments reminiscent of the past.
Many investment advisors are directing their clients towards mutual funds. While these can offer potentially higher returns, they come without guarantees. This means that while there’s a chance for a better return, there’s also a risk to your capital.
Enter Segregated Funds.
These investment vehicles combine the benefits of mutual funds with the added security of specific guarantees, much like a life insurance product. Their name comes from the fact that their investments are kept separate (or “segregated”) from the insurance company’s general investment funds.
One of the standout features of Segregated Funds is the guarantee they offer.
For instance, if the owner of a Segregated Fund passes away, the beneficiary is assured at least 100% of the money invested, regardless of its market value at the time. In contrast, with ordinary mutual funds, if the fund’s value has decreased by 50% at the time of the owner’s death, the beneficiary would only receive half of the initial investment.
Some Segregated Funds offer different levels of guarantees, and 85% is one of the common guarantee levels. The choice between a 100% guarantee and an 85% guarantee (or other percentages) often comes down to a trade-off between cost and level of protection:
Cost: Typically, the higher the guarantee, the higher the cost (or fees) associated with the fund. A 100% death benefit guarantee will generally have higher management fees than an 85% guarantee.
Potential Returns: Funds with a lower guarantee might offer the potential for higher returns. This is because a portion of the fees saved from opting for a lower guarantee might be invested to potentially generate higher returns.
Risk Tolerance and Investment Horizon: Investors with a higher risk tolerance or a longer investment horizon might opt for an 85% guarantee to benefit from potentially higher returns, while those seeking maximum protection, especially if they’re closer to the maturity date or are more risk-averse, might prefer a 100% guarantee.
Purpose of Investment: If the primary goal is estate planning or ensuring a specific amount is passed on to heirs, a 100% guarantee might be more appealing. If the goal is growth with some level of protection, an 85% guarantee might be sufficient.
Another advantage of Segregated Funds is their long-term guarantee.
Most promise that no matter the market conditions, after a decade, you’ll receive at least 75% of your initial investment. This is a safety net not found in traditional mutual funds.
Additionally, Segregated Funds offer protection from creditors.
By designating a preferred beneficiary, the investment is shielded from creditors both during the investor’s lifetime and after their passing. This beneficiary designation also sidesteps probate, probate fees, and legal costs, ensuring a faster transfer of assets.
Timing is always a concern with fluctuating investments. The goal for most investors is to buy more when prices are low and less when prices rise. Segregated Funds allow for this by enabling consistent monthly investments. This strategy ensures that more units are bought when prices are low and fewer when they’re high, making it an ideal approach for long-term investment goals like retirement or education funds.
In the ever-evolving world of finance, it’s crucial to stay informed and make decisions that align with both current market conditions and future aspirations.
Traditional investment avenues might not offer the same allure they once did, butinnovative solutions like Segregated Funds present a compelling alternative. They bridge the gap between the potential of mutual funds and the security of life insurance guarantees.
Whether it’s the peace of mind from death benefit guarantees, the long-term assurance of getting back a significant portion of your investment, or the protection from creditors, Segregated Funds offer a unique blend of benefits not found in traditional mutual funds. However, as with all investments, they come with their nuances. The choice between guarantee levels, understanding the associated costs, and aligning with one’s financial goals and risk appetite are all pivotal considerations.
As we navigate these investment waters, it’s paramount to remember that our financial journey is deeply personal.
What works for one might not work for another. It’s essential to understand one’s financial goals, risk tolerance, and the specific features of the Segregated Fund before diving in. Collaborating with a financial advisor can provide clarity, ensuring that the chosen path aligns seamlessly with individual needs and circumstances. In the end, the true value of an investment isn’t just in its returns, but in the security and peace of mind it offers.
