Vasu, a 24-year-old software developer, recently started investing to secure his financial future. While researching investment options, he came across research on segregated funds. Which statement about segregated funds is incorrect? Question 30Select one: a. guarantee on deposits when contract matures b. offers life and disability insurance c. provides economies of scale d. are insurance products
The correct answer and explanation is:
The incorrect statement about segregated funds is:
a. guarantee on deposits when contract matures.
Segregated funds are insurance products, but they do not guarantee deposits in the same way that bank deposits are guaranteed. They are investment products offered by insurance companies, and while they may offer certain guarantees, such as a guarantee on the value of the investment at maturity or death, these guarantees are typically related to the value of the units in the segregated fund, not the full principal amount.
Explanation:
Segregated funds are a type of mutual fund that is offered by insurance companies. They are designed to combine the features of both insurance and investment, which is why they are categorized as insurance products. Segregated funds can provide investors with certain guarantees, such as a guarantee of principal at maturity or death (typically a 75% or 100% guarantee on the original investment, depending on the contract). These guarantees are backed by the insurance company, making them distinct from traditional mutual funds.
The correct characteristics of segregated funds include:
- Life and disability insurance: Many segregated funds offer life insurance and disability coverage as part of the package. This can provide beneficiaries with a payout in case of the investor’s death.
- Economies of scale: Like other pooled investment products, segregated funds can provide economies of scale, allowing smaller investors to access a diversified portfolio of investments at a lower cost.
- Insurance products: Segregated funds are technically insurance products, as they are offered by insurance companies, and the guarantees they offer are tied to the insurance component.
Therefore, the key distinction between segregated funds and other investment vehicles like mutual funds is the inclusion of guarantees and insurance benefits.