With so many different investment assets on the market, it can be difficult to choose the right one for you.
For Canadian investors seeking safety from their investments, GIC and mutual funds are two of the best. But what is the distinction between the two?
In this article, you will learn everything you need to know about both GICs and mutual funds. For many Canadian investors, there are two of the best ways to be investing in Canada.
GICs vs Mutual Funds
Here are some of the primary differences between the two assets.
Investment Goals
GICs and mutual funds suit two completely different types of investors. With a GIC, investors are looking to defend their capital and earn some interest with no risk of losing any of their money. This is why they are so popular among retirees or investors looking to hedge against market volatility.
Mutual funds are long-term investment assets and suit accounts like a TFSA or an RRSP. You can continuously add money to your mutual fund investments and re-invest any distributions you might receive.
These assets are for those seeking long-term capital appreciation and who also understand the risk of investing in mutual funds.
Investment Horizon
As mentioned, mutual funds are for long-term investors who are looking to grow their investments over time. Mutual funds are great for tax-friendly, registered accounts in Canada where you will not be taxed on capital gains or distributions.
When it comes to GICs, they have an extremely short-term investment horizon. GICs can have terms of anywhere from 30 days to 5 years.
Risk Tolerance
GICs are perfect for the most risk-averse investors. Buying GICs guarantees you will receive your initial investment at the time of expiry. Essentially, this means there is little risk of losing any of your capital when investing in a GIC.
Most mutual funds hold individual stocks and provide investors with a basket approach to investing. This is safer than investing in individual stocks, but be warned that you can still lose money while investing in mutual funds.
While mutual funds are still considered a safer investment, they still come with some risk to the investor.
GICs Explained
A GIC or Guaranteed Investment Certificate is a type of fixed-income investment. It acts like a loan to a financial institution or even the government. When the term of the GIC expires, then you get your investment back along with any interest that might have been earned.
These assets have a low-risk rating and thrive in environments where interest rates are rising. GICs are popular among retirees since they provide a small return as well as a guaranteed return on your initial investment.
Mutual Funds Explained
A mutual fund is an investment asset that holds assets like stocks or bonds. While they offer a level of safety compared to individual stocks, mutual funds can incur losses, unlike a GIC.
Mutual funds pool investments from shareholders to purchase the underlying assets in the fund. These have historically been actively managed funds, which tend to lead to higher MERs and management fees than similar assets like ETFs.
Pros and Cons of GICs
The benefits of investing in GICs should be fairly obvious: you cannot lose your initial investment capital. This means they are an extremely low-risk investment with a complete guarantee of earning returns.
GICs are easy to invest in and are available at most Canadian brokerages. There is typically a low initial minimum investment of about $500.
You can invest in GICs in all registered and non-registered accounts. Ideally, you would use a tax-friendly account like an RRSP or a TFSA.
The downside of GICs is also clear: the returns are low and may not be more than the rate of inflation. This means while your money is locked into a GIC, your investment could be losing value.
Another downside is that your funds are locked in for the term of the GIC and must remain there if you want to earn your full returns.
Pros and Cons of Mutual Funds
Mutual funds offer investors an easy way to invest in a basket of different assets. It is a cheaper alternative to owning each stock that is held in the fund.
These funds are available at nearly every Canadian brokerage. There are over 5,000 mutual funds in Canada, so there is bound to be one that suits your investment goals.
In Canada, mutual funds are a convenient way to invest in the broader markets, especially for people who are not active investors.
One downside to mutual funds is that many of them come with high MERs or management fees. These are usually around 1% to 1.5% in Canada. This means that for every $10,000 you invest, you will owe between $100 to $150 each year.
Another downside is that you are at the mercy of the fund manager. Poor trade execution can have a direct impact on your long-term gains.
GICs vs Mutual Funds: Which is Better?
To answer this accurately, it will depend on your investment goals. These two assets are suited for two entirely different types of investors. GICs are for those seeking low-risk and guaranteed returns. Mutual funds are for those seeking long-term capital growth.
If you are seeking safety, then GICs are probably your best bet. For those who want potentially higher returns that can compound over time, mutual funds are the choice.
FAQs
Only in that mutual funds have the potential for higher long-term returns and growth. You can also lose money when investing in mutual funds, which is not true for GICs.
Historically, bonds have outperformed GICs in Canada, although that gap has narrowed when the prime rate rises. Both assets provide returns with low risk, although GICs are guaranteed returns, while bonds do have some uncertainty.
Yes! GICs are one of the safest investment assets in Canada. Their guaranteed return makes them inherently safer than investing in mutual funds.
By definition, it is impossible to lose money when invested in a GIC. Your invested money can lose value if the rate of the GIC trails the rate of inflation in Canada.
Yes, but you first have to sell the desired amount from your mutual funds. This can incur taxable gains and even potential fees from your mutual fund provider.
GIC rates are directly tied to the prime rate in Canada. When the interest rates rise then so too will the GIC rates. This also means that when interest rates fall, GIC rates will as well.
