Mutual Funds vs Segregated Funds: Key Differences

Mutual funds and segregated funds both help you to invest in market-linked assets. The work is the same, but their bases are different. A mutual fund is mainly designed for investment. A segregated fund combines investment with certain insurance benefits.

For Indian investors, there is one more point to understand. Segregated funds are mainly seen in countries such as Canada. So, knowing this is important. For investors, this guide shares the brief details on both.

What Are Mutual Funds?

A mutual fund pools money from different investors and invests it in shares, bonds, or other securities. This is managed by experts known as fund managers.

You get units based on the amount you invest and the fund’s NAV. The same keeps on changing based on the market value of the fund.

Mutual funds can invest in different places based on the type of fund. These can be:

• Equity funds.
• Debt funds.
• Hybrid funds.
• Index funds.
• Liquid funds.
• Sectoral or thematic funds.

The risk also varies in each case. For instance, equity funds are considered to have the highest risk-return ratio. But if you go for a liquid or debt fund, the risk is low and so is the return. Therefore, the choice needs to be made with great care.

What Are Segregated Funds?

A segregated fund is also used for investment, but it comes through an insurance company. This is the main difference.

The money is still invested in market-linked assets such as stocks and bonds. The investment is more like insurance contract and so there will be added benefits.

These can include:

• A maturity guarantee.
• A death benefit guarantee.
• Beneficiary benefits.
• Certain creditor protection, depending on the rules.
• Estate-related benefits.

Now, this does not mean the investment cannot fall.

Suppose the market performs badly. The value of the segregated fund can also go down.

The guarantee generally applies only under the conditions mentioned in the contract.

For example, a fund may guarantee a certain percentage of your eligible investment at maturity. But if you withdraw early, the same benefit may not apply.

So, the guarantee needs to be understood properly before you consider the product.

Segregated funds are commonly seen in countries such as Canada. They are not a common investment product in India.

Are Segregated Funds and Segregated Portfolios the Same?

No. This is where confusion can happen. In India, we also use the term segregated portfolio in mutual funds. But this is a completely different concept. 

A segregated portfolio is created when a particular debt or money-market security in a mutual fund faces a credit event.

Let us say a debt fund has invested in bonds issued by a company. Now the company faces a major credit issue and the value of those bonds becomes difficult to determine.

In such a case, the affected security may be separated from the main portfolio as per applicable rules. This helps keep the affected investment separate from the rest of the fund.

So, understand the difference clearly:

Particular	Meaning
Mutual fund	A pooled investment product
Segregated fund	An investment product linked with insurance
Segregated portfolio	A separate portfolio created within a mutual fund in certain credit events

What Is the Difference Between Mutual Funds and Segregated Funds?

The difference between mutual funds and segregated funds comes mainly from the insurance part.

A mutual fund focuses on investment. A segregated fund has investment plus certain insurance-based benefits.

Here is the comparison:

Particular	Mutual Funds	Segregated Funds
Product type	Investment product	Investment with insurance contract
Offered by	Asset management companies	Insurance companies
Market-linked	Yes	Yes
Guarantee	Usually no	May be available
Death benefit	No insurance-style guarantee	May be available
Cost	Generally lower	Can be higher
Liquidity	Depends on the fund	Depends on the contract
Risk	Market risk applies	Market risk still applies
Common in India	Yes	No

1. Investment Structure

Mutual funds are simple in structure. You invest money in a scheme and the fund manager invests it based on the fund objective.

Segregated funds work differently because the investment is part of an insurance contract. This is why they can offer benefits that normal mutual funds do not provide.

2. Guarantee on Investment

Mutual funds do not usually guarantee your investment amount. If you invest ₹1 lakh and the market falls, your investment could drop to ₹90,000 or even less.

There is no fixed promise that the original amount will be restored.

Segregated funds may provide a guarantee on a part of the amount invested but this is still not full protection.

You need to check:

• How much is guaranteed?
• When does the guarantee apply?
• Is there a fixed maturity period?
• What happens if you withdraw early?
• Does the guarantee reduce after withdrawal?

Without checking these things, the guarantee number alone does not tell you much.

3. Cost

There is an expense ratio in mutual funds, which is the charge you pay to get the fund properly managed. Segregated funds can cost more because they also include insurance features.

While there is a charge in both, the difference in charge is what you need to see. 

4. Liquidity

Mutual funds can generally be redeemed when required if they are open-ended. But there may be exit load or other conditions depending on the scheme.

Segregated funds may have additional conditions because the guarantee may be linked to a specific period. If you withdraw before that, your benefit may reduce.

So, if you may need the money early, this becomes an important point.

5. Death Benefit

Mutual funds do not provide a death benefit in the way an insurance contract does. If the investor dies, the units are transferred in accordance with the nomination and transmission process.

Segregated funds may provide a death benefit guarantee to the beneficiary. Again, the actual amount will depend on the contract.

6. Availability

Mutual funds are widely available in India. You can invest through AMCs, brokers, and investment platforms.

Segregated funds are different. They are mainly seen in markets such as Canada and are not a standard investment option in India.

So, an Indian investor should not assume that both products are equally available.

Read Also: Cyclical vs Defensive Stocks: Key Differences

What Should You Check Before Choosing Between Mutual Funds and Segregated Funds?

As an investor who is looking to invest, a proper comparison is important. You should know where you are investing and what you can expect in return. Some of the key points that you should consider over here are as follows:

1. Your Investment Goal

Start with why you are investing. It can be:

• Retirement.
• Long-term wealth creation.
• Children’s education.
• Buying a house.
• Building a future corpus.

Matching the fund with your goal will give you better returns and will help you ensure that your demands are met well. 

2. Risk

No matter which of the two you select, you will have some risk involved. A segregated fund may offer a guarantee, but that does not mean the investment value cannot move.

Mutual fund risk also depends on the category. Hence, it is important that you understand the amount of risk you are willing to take and then select the fund.

3. Charges

When you are investing for the long run, there will be some costs that will keep adding up. In other words, even if there is a small charge, the same will look high when the total amount adds up in the near future. 

Compare the benefits you can get with the charges that are paying for them. Ask whether those benefits are actually useful for you.

4. Guarantee Conditions

This is where you should spend some time. Mutual funds do not offer any type of guarantee. But if you see the segregated fund, there is a guarantee. This needs to be checked properly, and you must see what it means and how it can benefit you. The benefit can change based on how you use the product.

5. Investment Period

Your time period also matters. If you need money after two years, a product with a long maturity condition may not work well.

Similarly, some mutual funds are better suited for longer holding periods because the market can move sharply in the short term.

So, match the product with the actual time you have.

Conclusion

Mutual funds and segregated funds both invest in market-linked assets. But the structure of both is different. This is where you need to actually evaluate and analyse the same well. As an investor, knowing the details and getting support from an expert should be very useful.

This is where Pocketful can help you. The platform offers you details of where to invest, how much to invest, and also the comparison, which can save your time and ensure better outcomes.

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