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Segregated Funds vs Mutual Funds in Canada (2024)

Segregated Funds Vs Mutual Funds

Segregated Funds vs Mutual Funds in Canada (2024)

Deciding where to invest your money is a big deal. With so many options, it’s easy to feel overwhelmed and stressed out when weighing the pros and cons of each fund.

Both segregated and mutual funds have their own advantages and disadvantages, but I think one comes out on top, so which is it?

I’ve found that mutual funds are more cost-efficient and provide investors with much more variety, making it the superior option in most cases.

Before you decide, take a look at this segregated funds vs mutual funds in Canada comparison. Let’s see what each fund offers and why I think mutual funds are the clear winner here for most Canadians.

Why Mutual Funds Make More Sense

While segregated funds definitely have their advantages in certain situations, mutual funds are usually the better choice for investors. Here’s why.

Mutual Fund Basics

Just like segregated funds, a mutual fund is a pooled investment managed by a qualified investment firm. With many options to choose from, you can diversify your portfolio, which can lead to fewer market fluctuations and increased investment growth.

Mutual Fund Advantages

In addition, mutual funds are generally significantly cheaper than segregated funds. Because of their insurance guarantee, segregated funds cost more. And those added costs can eat into any potential money you can make.

While the guarantee of segregated funds is alluring, is it really necessary for the typical investor? It’s easy to argue that you’re paying for that guarantee with all the additional costs associated with the fund. That’s money that you could be investing in mutual funds.

And does the guarantee matter? If you have a diversified portfolio of investments, it’s probably not very likely that each of them will become worthless in the long term – they should always retain some sort of value.

In addition, mutual funds have no set maturation date, and funds can be withdrawn at any time, although there may be a penalty of some sort, so you can easily pull an investment if it isn’t performing up to your standards.

On the other hand, segregated funds get locked into a maturity date, and you really can’t access it unless you take a chance on receiving the current market value, a value that may be significantly lower than your initial investment.

Don’t forget you’ll also have to pay early withdrawal fees and forfeit your principal and death benefit guarantee.

While mutual funds do not offer protection from creditors or market volatility, spreading your investments out in different funds and risk tolerances, help to mitigate any hits from potential fluctuations. 

The bottom line is that mutual funds are easy to invest in and do not require much change to start. While segregated funds do have the advantages of credit protection and death benefit guarantees, you may have to ask yourself if that’s worth its high costs and limited investing options.

What Is a Segregated Fund?

A segregated fund is a collective pool of funds investors pay into. While that’s similar to a mutual fund, segregated funds include investments within insurance contracts and are often sold by insurance companies.

What Are The Advantages and Disadvantages of Segregated Funds?

While segregated and mutual funds share some benefits, here is where the segregated funds shine.


  • Maturity and Death Benefit Guarantees – Most segregated funds guarantee about 75%-100% of premiums paid on the policy. This means you’ll get most or all of your original investment back in the event of maturity or the policyholder’s death.

There is also a death benefit guarantee, which means your beneficiaries receive the higher of the guaranteed death benefit amount or the market value of investments.

  • Market Volatility Protection – While both funds are susceptible to market fluctuations, the maturity and death benefit guarantee of segregated funds includes an added layer of protection.
  • Lock-In Market Gains – For an added fee, you can lock in gains as part of the principal when you reach a certain maturity or death guarantee. This means you could add to your investment growth and leave your beneficiary even more money.
  • Creditor and liability protection – Unlike mutual funds, segregated funds may be protected from creditors when a specific beneficiary is named. It also means that upon death, creditors can’t go after the assets within your policy.


  • Higher costs – Because segregated funds come with insurance guarantees, they cost much more than mutual funds. This difference alone is a huge detriment to segregated funds and a big reason why many investors choose mutual funds.
  • Restrictive investment options – Because there are so many different types of mutual funds, it’s easy to pick and choose the right ones to fit your needs and risk tolerance. Depending on your age and financial standing, you may wish to select riskier funds when you’re younger and safer and more secure ones as you near retirement.

It’s not the same for segregated funds. Because the management team needs to guarantee the performance of their investments, they only have limited options to invest in, leaving the potential for less growth over time.  

How To Determine Which Product Is Right for You?

Doing your own research and understanding how both products work is the only way to make a solid decision regarding your investments.

You might consider segregated funds if you:

  • Worry about leaving a legacy. Segregated funds don’t go through your estate and are not subject to probate. This means your money can pass to beneficiaries quicker and without added hassle.
  • Want to keep your money from creditors. With segregated funds, credit protection is possible when certain family members are named beneficiaries.
  • Worry about market fluctuations. The death benefit guarantee is a huge comfort for those worrying about leaving behind smaller amounts because of market swings and changes due to the stock market.

You might want to consider mutual funds if you:

  • Want variety. Mutual funds offer a wide variety of choices for investments depending upon your needs and risk tolerance levels.
  • Want lower costs. With mutual funds, there are lower fees when you invest and typically higher returns, meaning you get more for your money.
  • Easy to get started. It’s easy to invest in mutual funds. Banks and investment brokerages offer ways to get started with minimal money down. You can sign up online through most brokerages and start investing right away.

Who Offers Segregated Funds In Canada?

If you decide segregated funds are the right fit for you, you need to get in contact with a life insurance representative authorized to sell those funds in Canada.

Here are only some of the insurance brokers that offer segregated funds:

  • Sun Life
  • RBC Insurance
  • Equitable Life of Canada
  • Manulife Investment Management


For most people, mutual funds provide an ok way to start investing based on their assessed risk. They’re easy to get started with, and offer a variety of investment options.

While segregated funds might offer guarantees and protection from creditors, their exorbitant fees and limited investment options make it an easy pass for me. 

If you’re looking to start investing and need some low-cost options, check out these 15 Best Mutual Funds in Canada.

An option I prefer more than mutual funds or seg funds is ETFs, because of it’s lower fees. Learn all you need to know about ETFs here.

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