Mutual Funds vs. Segregated Funds: What’s the Difference?

Canadians planning to retire are looking for options that provide growth in their retirement investment, but they also desire stability. But is it possible to have the best of both?

A surprising number of people are unaware that segregated funds may provide both benefits. But what about mutual funds? What’s the difference between the two and how do they compare?

Segregated funds and their mutual fund equivalents seem to be quite similar at first glance. In both cases, you have access to your funds via a broad portfolio of investments and competent money management.

Understanding how each one works is an important aspect of investing. In this article, we’ll go over the key differences between mutual funds and segregated funds.

It’s important to note that both mutual funds and segregated funds have risks associated with them, regardless of how they work. However, by understanding how each works, you can make informed decisions for your retirement future.

What are mutual funds?

A mutual fund is a basket of stock (equity) and/or bonds. It consists of assets that are pooled together in one fund which is managed by professional money manager on behalf of the fund’s investors.

By pooling your resources together with other investors, you’re able to share costs the cost of a manager. At the same time, it reduces how much money you need to start investing.

Investing in mutual fund is done by purchasing the fund’s units or shares. New units (shares) are issued by the fund when more individuals invest.
portfolio manager (also known as a fund manager) is in charge of overseeing the investments made by the mutual fund’s investors. He/she manages the fund on daily basis, making investment decisions based on the fund’s investment goals. This means that it is a ‘hands off” approach for you, as an investor, since the fund is managed for you by the portfolio  manager. Having a portfolio manager who’s sole job is to manage the fund and understand the markets and investments your funds are in maximizes returns and minimize risks. However, it isn’t free. Mutual funds will charge annual fees for fund operating expenses – also known as mutual fund expense ratios or advisory fees. These fees will typically be between 2% – 3% or more for ‘sector funds’. When you are told that a fund returned 8.5% last year, that is always net of fees. i.e. the fund has already paid the manager when you received your 8.5%

What are the benefits of mutual funds?

Mutual funds are one of the well-known investment vehicles and offer several benefits. Here are some of the main ones:

  1. Professional management: A professional investment manager will decide where and how to invest your money within the guidelines of the prospectus. They’ll also explain their reasoning behind these decisions, helping you gain a better understanding of your investments. Your advisor plays the role of relationship manager. He / she can answer all your questions.
  2. Diversification: Mutual funds allow investors to buy into different types of investments through one single investment, pooling together their money to minimize risks and costs. Imagine if you think India is a great place to invest. Ask yourself, am i qualified to buy shares of Indian corporation plus quantify the foreign exchange AND do that every day? Hence, a manager is needed.
  3. Liquidity: Investors can sell mutual funds at any time since they are publicly traded, making it a great option for both short and long-term investments.
  4. High returns: Mutual funds have historically outperformed other investment types, with an average return of 8-9%, according to several studies.
  5. Easy to invest: Mutual funds offer investors the opportunity to invest their money regardless of how much they have. It is also ideal for beginner investors to start their investment journey. This is a ‘hands off’ investment style. You can invest then go on holidays.

Disadvantages of mutual funds

Just like any other investments, mutual funds are also not free from risks. The key disadvantages of mutual funds are:

  1. Fees: Mutual funds charge fees to cover operational costs, management fees, administration fees, marketing fees, etc. These can add up quickly, reducing your profits. They are typically 2% – 3% or more of your investment each year.
  2. Less control: When investing in mutual funds, you’re not in control of the investments made on your behalf – that’s the fund manager’s job.
  3. Tax consequences: Mutual funds are subject to tax just like stocks, In a non tax sheltered account, you will receive a T3 or T5 every year. Except if your mutual fund sits in an RRSP or RRIF or TFSA or LIRA, etc.

What are segregated funds?

A segregated fund (or “seg” fund for short) is an investment fund offered by life insurance companies that combines the growth potential of a mutual fund with the security of a life insurance policy. Most seg funds offer 100% of your capital guaranteed on death, within a 10 or 15 year time frame. Additionally, there may be a guarantee of 75% of your capital on maturity. You can think of them like mutual funds with an insurance policy “wrapper”. The term “segregated” refer to the fact that assets in this fund are separated or “segregated” from the assets of the insurance company.

Unlike mutual funds, most segregated funds provide a guarantee that a portion of your investment, minus management and other related costs, will be protected. This way, even if the underlying fund suffers a loss, you are assured to get a portion or the whole of your initial investment back. For the guarantee to be effective, you must retain your investment for a certain period of time (often 10 or 15 years) before it may be used.

Additionally, there are no fees when you die. So, your heirs receive 100% of the account value.

What are the benefits of segregated funds?

Segregated funds can offer some great benefits for many Canadians. Here are some of the main ones:

  1. Principal guarantees: These funds are protected by Assuris, who guarantees that you will retain at least 85% of the guaranteed amount on your segregated fund policy. For policies that have a guaranteed amount of $60,000 or less, you will retain 100% of your guarantee.
  2. Guaranteed returns after death:  The seg fund will pay out its benefits after the unit holder’s death. This can be beneficial for surviving family members looking to acquire money after losing a loved one. Death and maturity guarantees ensure that you will retain a minimum amount from your investment regardless of market performance. The guarantee on an individual segregated fund policy is typically 75% or 100% of what you invested.
  3. Creditor protection: Segregated funds are considered a priority claim, which means that creditors cannot access your money in case of bankruptcy or law suit.
  4. Highly diversified: Generally, segregated funds are highly diversified and invest in different assets like stocks or bonds, making them less risky than individual stocks while historically making good returns.

Disadvantages of segregated funds

Just like any other investment, segregated funds do come with certain risks that you should be aware of. The main disadvantages are:

  1. Fees: Segregated funds also charge fees for management, operation, etc. The fees might be even higher than those charged by mutual funds. Although, on larger investment amounts, this is not the case.

Key differences between mutual funds and segregated funds

To better understand the key differences between the two investment types, it’s important to take a closer look at their main characteristics.

  1. Fees: Both mutual funds and segregated funds charge fees. However, when it comes to segregated funds, the fees are sometimes higher than mutual funds.
  2. Liquidity: Both mutual funds and seg funds can be cashed at any time. For seg funds, you may lose the capital guarantee.
  3. Security: Since segregated funds are protected by Assuris, it is considered an advantage. Mutual funds aren’t protected by the Canada Deposit Insurance Corporation (CDIC) or any other government insurer, which adds a level of risk.
  4. Death benefits: Segregated funds offer death and maturity benefits, while mutual funds do not. With segregated funds, you have peace of mind knowing that your money is completely safe even after you die, plus there is not a fee to the estate.
  5. Creditor protection: Segregated funds offer creditor protection, while mutual funds do not. With a segregated fund, your money may be safe from creditors in case of bankruptcy or law suit.
  6. Guaranteed returns: When it comes to segregated funds, the contract guarantees that you will receive 75% or 100% of your original deposit. On the other hand, mutual funds are safe but not guaranteed. Investing is all about net returns to you, the investor.


So there you have it! If you’re looking for a comparatively safe investment, segregated funds are the way to go. If you want the freedom to access your money at any time (for example, in case of an emergency), both seg funds & mutual funds are suitable for. Both investment vehicles are designed for certain needs and have certain advantages and disadvantages. As always, it’s important to do your research and discuss your options with a Certified Financial Planner.

The goal of investing is to make money. Mutual funds & Seg funds offer the investor a relatively hands off way to make money.

At Pension Solutions Canada, we specialize in assisting people in preparing for retirement. Allow us to evaluate and review your retirement income sources and assist you with retirement planning. Call us at 1-888-554-6661, or click here to book a virtual Zoom meeting.

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