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An insurance policy in mutual fund clothing

A segregated fund is like a mutual fund with some of the features of a life insurance policy. As with a mutual fund, a seg fund's return is based on the performance of an underlying portfolio of stocks or bonds.

But segregated funds -- sometimes called guaranteed investment funds, or GIFs -- come with an added twist. If you keep your investment for 10 years, you are guaranteed to get at least some of your money back. The guarantee usually covers 75 or 100 per cent of your principal.

That can be a handy thing in a falling market. If you had the misfortune to put $10,000 in CI Fund Management Inc.'s Landmark American Fund five years ago, your investment would today be worth about $7,800.

But if you bought the segregated fund version that comes with a 100-per-cent guarantee, you would be breathing easy, secure in the knowledge that, at worst, you'd get your original investment back at the end of the 10-year period.

But, as with all promises in the investment business, this one comes at a cost.

Seg funds are a lot more expensive than mutual funds because part of your money is used for insurance, which means their returns are lower.

If you don't end up using the guarantee, seg funds are not worth the added cost.

The biggest advantage of seg funds might not be the principal guarantee, but the other benefits that arise from their legal status. Seg funds are insurance contracts. In most cases, they cannot be seized by creditors. That makes them attractive to small-business owners or self-employed types like lawyers and doctors, who are vulnerable to losing personal assets if they get sued.

Seg funds also carry a death benefit, which means that if you die within the 10 years of the contract, your heirs are certain to get at least the amount you invested, without paying probate fees on the money. Like life insurance, there can be age limits on who can buy them. For example, Mackenzie Financial Corp. won't sell seg funds with a 100-per-cent guarantee to anyone over the age of 69.

© 2007 The Globe and Mail. All rights reserved.

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