Mutual Funds
These are investment funds that pools money from various investors. The investment managers will then manage it and invest it in various securities such as stocks, bonds, and other assets. The securities in which the fund invests in comprises the portfolio of the fund.
For example, an index fund is a type of mutual fund that tracks an index. The ASX 200 index fund replicates the performance of Australia’s largest 200 companies. Therefore, its portfolio comprises of those companies. As a result, you are buying a portion of its portfolio value when you invest in a mutual fund.
Subsequently, net asset value (NAV) determines the funds portfolio value. You can calculate the NAV by dividing the total value of securities by total amount of shares outstanding.
Typically, investors invest because of:
- Diversification – one mutual fund can invest in hundreds or thousands of securities at once. For example, the ASX 200 comprises of Australia’s 200 largest companies such as Woolworths, CBA, BHP, etc.
- Affordability and Simplicity– most mutual funds have low management fees and are very friendly to beginners. This is because a beginner investor does not need to buy individual securities, but rather, buy a portion of the fund which will be managed by professionals.
- Professional Management – Professionals manage the mutual funds, you don’t need to keep track of it. It is appropriate for people who are intending to invest and forget about it.
- Liquidity – stock-like features allow mutual funds to be liquid. A buyer always exists at any given time.
To read more on mutual funds, you can read an article on ETFs here.
Segregated Funds
A Segregated fund is an investment fund that also pools money from investors. Like mutual funds, segregated funds are made up of underlying assets. The portfolio are the companies in which the fund invests in and managed by professionals. However, a segregated funds is sold alongside an insurance and are designed as contracts. The insurance exists in case of the owner dying before maturity. This extra insurance factor leads to higher management fees.
Differences between Mutual Funds and Segregated Funds
- Insurance companies sells segregated funds whereas investment management firms sells mutual funds.
- A segregated fund is not as liquid as a mutual fund since it is a contract.
- Since it is a contract, a segregated fund usually has a guaranteed payout of 75%-100% of the initial investment. Conversely, in mutual funds, you have the risk of losing all your money.
- A segregated fund has higher management fees due to the insurance it contains.
Conclusion
To conclude, a mutual fund and a segregated fund is similar in that both are funds that invests in underlying assets. Both funds are managed by professional managers. However, because a segregated fund is structured as a contract, they are not as liquid as mutual funds. There are less risks but higher management fees as a result. Which one you decide to invest in depends on your risk tolerance. Subsequently, to minimise your risk, you can consult a business lawyer.
