Tax Advantages of Segregated Funds versus Mutual Funds

Following from yesterday’s post on year end mutual fund distributions, I should point out that Segregated funds (which are very similar to mutual funds in that they are essentially investment funds but with certain guarantees on capital over time or upon death) are markedly different. Specifically:

1. Segregated funds (seg funds for short) can flow through capital LOSSES to the contract holder. These capital losses can be carried back 3 years, or forward indefinitely. Mutual funds cannot do this.

2. Seg fund distributions can be time-weighted (it depends on the company in question). This means that if you invested for only two months, you will get 2/12ths attribution on the distributions (interest, dividends or capital gains). This does not exist for mutual funds. Again as noted yesterday, if you invest in December before the year-end distributions are made, you could be taking on someone else’s tax liability.

These are not inconsequential differences!

Related posts:

1. Closed-End Mutual Funds versus Open-End Mutual Funds
2. Mutual Fund Corporations versus Mutual Fund Trusts
3. Stop Loss Orders on Mutual Funds?