Dale Jackson

Personal Finance Columnist, Payback Time

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ANALYSIS: There’s an old saying in the investment industry: mutual funds aren't bought, they’re sold.

That saying has never been truer than with segregated funds.

A segregated fund, or seg fund, is basically a mutual fund wrapped in a life insurance product. It has various holdings like a mutual fund, but up to 100 percent of the principal is guaranteed.

They’re popular with self-employed investors because they are protected from creditors in the event of bankruptcy.

Many are offered as versions of existing mutual funds that span asset classes, sectors or geographic regions. Most mutual fund companies offer them.

You may hold one in your RRSP or company pension plan without even knowing it.

Their appeal can be tempting to any investor; a chance for your money to grow as markets rise and a guarantee your initial investment is safe.

But that sort of safety has its price.

According to Globefund.com, many segregated funds charge a fee (MER) above 4 percent of the total value of the investment every year. Part of that goes to the advisor who sold the fund. In most cases the advisor can also get a fee when the fund is bought or sold.

How much risk the mutual fund company is taking off your hands is questionable. In most cases, the principal is guaranteed against losses over a 10-year period. Very few mutual funds lose money over a decade, even when you factor in short-term shocks like the 2008 financial meltdown and the most recent resource melt-down.

Paying for protection in some mutual funds just doesn't make sense. Segregated Canadian money market funds, for example, can charge in excess of 1.5 percent in fees each year. Money market funds hold ultra-safe, short-term debt like U.S. government T-bills or GICs (note the G stands for guaranteed).

Over the past year the average Canadian money market fund has returned 0.2 percent. The benchmark 91-day T-bill Index has advanced 0.5 percent over the same period.

That means segregated Canadian money market holders have been donating more than one percent of their investments to the mutual fund company every year.