Comparative Overview
In this section, we will explore the key similarities and differences between segregated funds and mutual funds. Each fund type serves different investment purposes, has unique legal statuses, and comes under different regulatory bodies. The comparative analysis table below provides a clearer picture of these factors.
Table 22.2: Comparing Segregated Funds to Mutual Funds
| Features |
Segregated Funds |
Mutual Funds |
| Legal Status |
Insurance contract |
Security |
| Owner of the Fund’s Assets |
The insurance company |
The fund itself, a separate legal entity |
| Nature of Fund Units |
No legal status (used for benefit calculations) |
Legal property (voting rights + distributions) |
| Regulator |
Provincial insurance regulators |
Provincial securities regulators |
| Issuers |
Mainly insurance companies |
Mutual fund companies |
| Main Disclosure Document |
Information folder |
Fund Facts document (simplified prospectus on request) |
| Frequency of Valuation |
Daily to monthly |
Daily to weekly |
| Redemption Rights |
Upon request |
Upon request |
| Required Financial Statements |
Annual (audited), semi-annual (unaudited) |
Annual (audited), semi-annual |
| Sellers’ Qualifications |
Licensed life insurance agents, recognized investment courses |
Licensed mutual fund representatives or registered brokers |
| Maturity Guarantees |
Minimum 75% of deposits, can be up to 100% |
None |
| Government Guarantees |
None |
None |
| Protection Against Issuer Insolvency |
Assuris (covers up to $60,000 or 85% of guaranteed amounts) |
MFDA IPC (coverage varies) |
| Death Benefits |
Yes (may have age/restrictions) |
None |
| Creditor Protection |
Yes (under specific conditions) |
None |
| Probate Bypass |
Yes (contract proceeds can go directly to beneficiaries) |
None |
Detailed Explanations
Legal Status
- Segregated Funds: These are considered insurance contracts because they are issued by insurance companies.
- Mutual Funds: These are securities and legal property in themselves, which means they carry certain rights such as voting and receiving distributions.
Regulators
- Segregated Funds: Regulated by provincial insurance regulators to ensure compliant operation within provinces.
- Mutual Funds: Regulated by provincial securities regulators, ensuring legal and transactional integrity in the securities market.
Ownership and Disclosure
- Segregated funds are owned by the issuing insurance company, whereas the mutual funds are separate legal entities managed by mutual fund companies. The primary document for segregated funds is the information folder, while mutual funds necessitate a ‘Fund Facts’ document.
Financial Safety Nets
- Segregated Funds: These offer maturity and death benefit guarantees, often involving payout of 75% to 100% of the principal amount. Assuris provides financial backing up to certain limits.
- Mutual Funds: Generally, do not come with maturity or death benefits. Insolvency protection comes through the Mutual Fund Dealer Association Investor Protection Corporation (MFDA IPC).
Segregated Funds Scenarios Activity
True or False: Key Features of Segregated Funds
- True or False? Segregated funds are considered securities and are therefore regulated by provincial securities regulators. (Answer: False) – They are insurance contracts regulated by provincial insurance regulators.
- True or False? One advantage of segregated funds is that they can bypass probate processes. (Answer: True) – Proceeds of the contract held by a deceased policyholder can go directly to beneficiaries.
- True or False? A unique feature of segregated funds is maturity and death benefit guarantees. (Answer: True) – They often have a minimum guaranteed value.
Glossary
- Segregated Fund: An investment usually offered by life insurance companies, combining both investment and insurance features. It often includes benefits such as maturity guarantees, death benefits, and more.
- Mutual Fund: A pooled investment vehicle that collects capital from numerous investors to purchase securities, managed by a professional portfolio manager.
- Maturity Guarantee: An assurance that a certain percentage of the investor’s principal will be returned at the end of a contract’s term.
- Probate Process: The judicial procedure through which a will is proved valid or invalid. Probating a will involves settling debts and distributing the decedent’s estate.
- Assuris: A not-for-profit organization that protects Canadian policyholders if their life insurance company fails.
- MFDA IPC: Mutual Fund Dealer Association Investor Protection Corporation offers client asset insurance up to specific limits.
Key Takeaways
- Segregated funds are regulated by insurance regulators, while mutual funds fall under securities regulators.
- Segregated funds provide more protective features such as maturity guarantees and probate bypass options compared to mutual funds.
- Both investment types have specified financial disclosures and require distinct professional qualifications for sellers.
📚✨ Quiz Time! ✨📚
## What is the legal status of segregated funds compared to mutual funds?
- [x] Insurance contract
- [ ] Security
- [ ] Real estate
- [ ] Employee benefit plan
> **Explanation:** Segregated funds are known as insurance contracts, whereas mutual funds are securities.
## Who owns the fund's assets in segregated funds?
- [x] The insurance company
- [ ] The fund itself
- [ ] Investors directly
- [ ] A government entity
> **Explanation:** In segregated funds, the insurance company owns the assets, whereas in mutual funds, the fund itself owns the assets.
## What document is primarily provided to investors in segregated funds?
- [ ] Fund Facts document
- [ ] Prospectus
- [x] Information folder
- [ ] Annual report
> **Explanation:** The main disclosure document for investors in segregated funds is the Information folder.
## What is the frequency of valuation for segregated funds?
- [ ] Weekly
- [x] Usually daily, and at least monthly
- [ ] Quarterly
- [ ] Annually
> **Explanation:** Segregated funds are usually valued daily and at least monthly.
## Who is protected by Assuris in the context of segregated funds?
- [x] Canadian life insurance policy holders
- [ ] Mutual fund investors
- [ ] Bondholders
- [ ] Common shareholders
> **Explanation:** Assuris provides limited protection to Canadian life insurance policy holders, not mutual fund investors.
## Which of the following is NOT a feature of segregated funds but is of mutual funds?
- [x] Voting rights for fund units
- [ ] Filed with provincial securities regulators
- [ ] Creditor protection
- [ ] Maturity guarantees
> **Explanation:** Mutual funds carry voting rights for fund units, but segregated funds do not.
## Who regulates mutual funds?
- [ ] Office of the Superintendent of Financial Institutions (OSFI)
- [ ] The insurance company
- [x] Provincial securities regulators
- [ ] Canada Revenue Agency (CRA)
> **Explanation:** Mutual funds are regulated by provincial securities regulators.
## What guarantees are generally offered by segregated funds but not mutual funds?
- [ ] Government guarantees
- [ ] Redemption guarantees on demand
- [ ] Dividends distribution
- [x] Maturity guarantees
> **Explanation:** Segregated funds typically offer maturity guarantees and not mutual funds.
## What kind of protection do segregated funds offer against issuer insolvency?
- [ ] None
- [ ] Canada Deposit Insurance Corporation (CDIC)
- [x] Assuris protection
- [ ] Office of the Superintendent of Financial Institutions (OSFI)
> **Explanation:** Segregated funds are protected by Assuris in case of issuer insolvency.
## Can the proceeds of a segregated fund contract bypass probate?
- [x] Yes
- [ ] No
- [ ] Only under federal jurisdiction
- [ ] Only under provincial jurisdiction
> **Explanation:** Proceeds of a segregated fund contract can bypass probate under certain conditions.