In the current investment climate, the guarantees inherent with a seg fund can start looking attractive to many people. So should you switch your investments from mutual funds over to seg funds?
The initial response to that would be yes - if you are willing to pay a slightly higher management fee in return for the guarantees we get with seg funds. But there’s at least one thing to consider before doing this - when should you make the switch?
We know that seg funds have minimum guarantees on your deposits (which would include your initial transfer). What isn’t normally guaranteed directly is your growth.
Now let’s assume that your investments will recover from their current abysmal level. Note that the markets generally correct or come back in fast spurts - over the course of a day or so, not over months. You’ll wake up one morning and it’ll be mostly back.
Let’s say you had $100,000 last year in mutual funds. Right now you’ve got $60,000. We expect it will return to $100,000 at some point in the future (that’s a basic underlying principle of the markets).
Now if you make the switch to seg funds now, your guarantees will be based on the $60,000. When the markets return, the growth of $40,000 isn’t generally speaking included in the guarantees.
However if you wait until your mutual funds return to $100,000 and then transfer over to a seg fund, your guarantees in the seg fund will be based on $100,000.
What to do? There’s no general answer to this as it depends on whether you believe your mutual funds will come back given your current investments, it also depends on some of the insurance companies’ seg guarantees. And the length of time you have until your maturity date should be considered as well - can you wait for your mutual funds to recover?
Like many things in the markets what we should do is the opposite of what we want to do. The best time guarantee-wise to move from a mutual fund to a seg fund is when markets are high, to lock in those guarantees. However the time most people want to trade off the higher fees for the guarantees is when the markets are low.