Smart move: the last time your stockbroker called, you took a pass on that pet-food dot-com IPO and those cheap shares in a Sumatran gold play. (Sure sounds an awful lot like Bre-X, you thought.)
So, you worry about taking unnecessary investment risks because you’re nearing retirement or just know better. But you’re also hungry for some market action. What to do? Segregated funds might be the answer.
“Seg funds” are like mutual funds, but with an insurance wrapper. They deliver gross returns similar to those of mutual funds, but they guarantee fundholders the return of 75% to 100% of their principal investment at the end of a specified holding period, usually 10 years. (Guarantee levels vary by fund.) So, if you invest $10,000 in a seg fund and the underlying investments tank, then you’ll still get most if not all of your original investment back when the holding period expires. However, the guarantee doesn’t apply if you cash out earlier. You’ll get current value for the fund, whether it’s above or below your baseline.
The catch: Critics of seg funds tend to focus on the costs. You’ll pay management fees comparable to those of mutual funds (say, 1% to 3%), plus insurance costs of up to 1%, depending on the guarantee level.
But seg funds give you good bang for your buck. Unlike other investment accounts, segregated funds allow you to name a preferred beneficiary (e.g., your spouse or child), whom your creditors can’t touch. Should you die before the holding period expires, the full value of your fund (and not less than its “guaranteed death benefit,” which is also in the 75% to 100% range) flows quickly and directly to your beneficiary, saving probate and estate administration fees.
Turbo tip: You can also “reset” some funds on occasion Ã¢Ã¢¬Ã¢¬ typically one to four times per calendar year Ã¢Ã¢¬Ã¢¬ to lock in any appreciated value. It’s as if you were starting the fund all over again, only your guaranteed principal is even higher and the holding period starts anew. For a rock-solid investment with a tasty bit of upside, it could be worth the wait.
© 2004 Caroline Cakebread