Describe the type of investor who would benefit from having segregated funds in their RRSP portfolio. Should I avoid these funds if the MER is over 2.75% and the hold period is ten years? — Philip

Barbara Garbens: Segregated funds provide an individual with a guarantee that they will not lose their money if the market conditions tank.  A cautious investor who may want to have some market exposure may want to invest in seg funds because of this guarantee.

There is usually a period of time during which you must stay in the fund, in your example you’ve given 10 years.  For someone who will absolutely not need the money, this may be a good place to put their cash but they need to make sure that the investment is sound since it is not as easy to switch funds mid term.

Seg funds are also creditor proof which may be a consideration if an individual is facing bankruptcy or will have to default on some debt obligations.

Finally, I don’t think the 2.75% in and of itself should be the only criteria to look at when deciding whether to buy or not.  There are many selection criteria when choosing a mutual fund (yes, seg funds are a type mutual fund).  Look at performance, who the manager is and how long he/she has been there, fees, quartile ranking in their peer group, volatility, and possibly holdings if you get into that level of detail.  You don’t want to duplicate your position in certain holdings that you may have elsewhere.

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