My advisor is trying to sell me Segregated Fund / investment loan, in summary, it is something like this:
- Canada Life (through National Bank) will lend me 100K to invest
- The annual interest is 2.7% - that is $2700 per year for me to pay to Canada Life
- I can only invest in mutual funds provided by Canada Life. (see list here)
- As you can see, the MER is around 3% - 3.5%, higher than normal MF.
- The principal of the investment loan is guaranteed, that means if I lost 50% of the principal. Canada Life will pay 25% and I am responsible for the remaining.
- My advisor is a friend of mine ( of course :) ), she also owns the similar product from another financial institution and has made pretty good return since 2019.
- The annual $2700 interest paid is tax deductible.
I am in my 40's and not new to investment. I have steady income and in my investment accounts I only hold low cost index funds and some active MF's I bought long time ago. I don't need this 100K loan to generate any investment income for me for awhile, probably not needed for 10 years. Our salary is enough to maintain our current life style.
I am fully aware I need to pay the loan interest and the 3% MER which is high. The reasons I am interested are,
1, I believe in long run (10+ years). The US stock market will continue to rise and the MF's I choose can continue to grow at annual rate of 6% to 13%.
I don't have 100K to invest and someone is lending me that much to do so.
The annual $2700 loan interest is tax deductible.
My advisor has it herself.
The underlying MF are managed by reputable fund companies like AGF.
Is there anything I miss? Is Segregated Fund / investment loan worth it? Thanks