Segregated funds have their shares protected to a certain degree by insurance.
The insurance protection advantage The notable advantage is that some segregated funds offer to insure up to 75% or higher, of the principal invested in a segregated fund if held for a number of years, typically 10. Depending on the situation, there may be some creditor protection if an investor went bankrupt if he owns segregated funds.
Diversification advantage Segregated funds offer the investor the benefit of maximum diversification, with minimal exposure to any one stock. You pool your investment with the combined capital of other investors, which allows everyone to invest in many companies, not just focus on two or three larger stocks.
Segregated Fund managers usually diversify among at least 20 companies, investing no more than 10% of the fund’s total dollars into any one security.
Other advantages of Segregated Funds
• You can buy additional shares of a segregated fund at any time.
• An automatic purchase plan called dollar-cost averaging (DCA) lets you invest equal amounts at regularly scheduled intervals. You buy more fund shares when the prices are lower, fewer when prices are higher, thus averaging out the price of the shares purchased.
• Segregated fund contracts can be registered in RRSPs or RRIFs.
• Dividends, where applicable, are easily reinvested.
• Some fund companies allow transfers between their funds without charge.
• You can borrow against segregated fund assets (unless the contract is registered).