The key differences between GICs and mutual funds are risk and returns. GICs offer guaranteed returns with low risk, while mutual funds provide higher growth potential but come with market volatility.
Understanding the differences between GICs vs. mutual funds is critical if you’re investing in Canada.
Below, you'll find details regarding the pros and cons of each of these products, their tax implications, and alternative investment options.
Key Takeaways
- GICs and mutual funds vary in risk and return.
- GICs are guaranteed to yield returns, but it’s low.
- Mutual funds are riskier and they charge fees, but the returns can be much higher.
- Many Canadians hold both GICs and mutual funds for different reasons.
GICs vs. mutual funds: What are the differences?
GICs and mutual funds differ significantly in risk, return, and accessibility.
Here is a quick comparison of both of these investment options:
| Mutual funds | GICs | |
|---|---|---|
| Risk and reward | * Higher risk * Not guaranteed returns * Higher potential return | * Near zero risk * Guaranteed returns * Lower returns |
| Fees and costs | * Higher fees * Lower initial buy-in * Better tax treatment for dividends and capital gains | * Low to no fees * Higher initial buy-in * Interest taxed at marginal rate |
| Control and flexibility | * Actively managed by professionals * Can sell and withdraw at any time | * You choose the GIC that works for you * Cannot withdraw at any time without paying penalty |
| Timeline | * Better for long-term growth | * Better for short- to medium-term growth |
Return and risk: GICs offer guaranteed returns with no risk, whereas mutual funds carry higher risk but offer greater long-term growth potential.
Fees and taxes: GICs charge no fees. Mutual funds often charge management expense ratios (MERs), and sometimes commissions or trading fees. GIC interest is fully taxable at your marginal rate, while mutual fund gains (dividends or capital gains) are taxed more favourably.
Access to money: GICs require you to lock in your funds until maturity, whereas mutual funds can be sold anytime (though there may be tax implications).
Investment timeline: GICs have a range of set term lengths, while mutual funds have no fixed timeline.
Both GICs and mutual funds can be held in registered or non-registered accounts. Both are widely available at financial institutions, from credit unions to the Big 5 banks.
Many investors choose both GICs and mutual funds to balance stability and growth.
Of course, other investments beyond GICs and mutual funds may also work for you, depending on your financial goals.
What is a mutual fund?
A mutual fund is a type of investment that uses money from multiple investors to acquire a selection of assets like bonds and stocks.
Why: Mutual funds help diversify an investor's portfolio more efficiently than any individual investment product could achieve on its own.
Types: The two types of mutual funds are open-ended and close-ended. Open-ended mutual funds don’t limit how many shares you can buy. Close-ended means there’s a limit on how many shares one person can purchase.
Fees: The main fee is the management expense ratio (MER) or expense ratio. This is how much the company charges to manage the mutual fund. It’s usually stated as a percentage like 0.04%, which means you pay that amount of your overall investment in fees.
Buying: You can buy mutual funds through an online broker or a big bank. Fees and commissions vary, so check the fine print carefully.
Who should invest in mutual funds?
You should consider investing in mutual funds if you fit one of these profiles:
- Long-term investor (aka not near retirement)
- Want the flexibility to withdraw your money at any time
- Accept higher risk for possibly higher reward
- Value having professionals decide what’s best for your money
Mutual funds can help diversify your investment portfolio in a single stroke. If you can withstand the ups and downs of the market for many years, mutual funds are a great addition to a long-term, growth-oriented portfolio that gives you the flexibility to access cash if you need it.
Mutual funds are not a good choice for short-term savings or guaranteed stability.
Pros and cons of mutual funds
Mutual funds offer valuable diversification and higher potential returns. However, you also pay fees – and there’s much more risk.
| Pros | Cons |
|---|---|
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Investors’ opinions vary. One Reddit user even said, looking back, "I could've grown my RRSPs more had I taken a lower cost approach." Another said some mutual funds are good, but they prefer something higher risk for an RRSP since the investment timeline is about 30 years.
What is a GIC?
A GIC is a Guaranteed Investment Certificate. You agree to deposit funds with a bank for a set period of time, and in return, you are guaranteed to earn a specific amount of interest. At the end of the term, you withdraw your original investment plus interest.
Risk: GICs are guaranteed. It’s almost impossible to lose your money.
Terms: 3 months, 6 months, 90 days, 1 year, 3 years, 5 years, 10 years – you choose the term of your GIC at purchase. Depending on the economy and the prime rate, shorter or longer terms may offer a better interest rate.
Access: You cannot withdraw your money from a GIC before the end of the term. Premature withdrawal usually results in a penalty.
Interest: Current GIC rates range from around 2% to 4%. That’s less than the potential return with mutual funds (between 2% and 14%), but your return with a GIC is guaranteed.
Buying: Buy GICs from big banks, credit unions, online banks, and investment firms.
Who should invest in GICs
You may find GICs especially valuable if you fit one of these profiles:
- Conservative investor who wants low risk
- Cost-conscious investor who wants to save money
- People with short-term savings goals
- People nearing retirement
GICs help you balance out other risk in your portfolio. They’re also a good choice for parking your cash in the short term to meet a specific goal, like saving for a wedding.
GICs are not a good choice, however, if your main goal is capital growth or long-term growth.
Pros and cons of GICs
GICs offer security with guaranteed returns, but they come with limited growth potential and access restrictions.
| Pros | Cons |
|---|---|
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Here’s what one investor said: "The rates were great with zero risk, but for an RRSP I’d invest in something with greater growth potential than GICs."
Other investment options you may want to consider
Canadians have access to a lot of investment channels, and each one offers unique advantages depending on your financial goals.
Here are complementary investment options:
- ETFs: Lower-cost than mutual funds, diversified funds that track the market with growth potential, suitable for long-term investing
- High Interest Savings Accounts (HISAs): Flexible accounts that offer higher interest rates, good for short-term savings or emergencies
- Tax-Free Savings Accounts (TFSAs): Tax-sheltered savings accounts where you can hold a mix of investments and grow your money tax-free, withdrawing for any reason
- Stocks: Direct investments in individual companies, has high growth potential but also greater risk
- Bonds: Fixed-income securities that provide stability and regular returns, ideal for conservative investors because returns are predictable but low
- REITs: Real estate investments that offer dividends and potential property appreciation without owning physical assets yourself
FAQ
What is a mutual fund?
A mutual fund is an investment vehicle that pools money from multiple investors to buy a diversified portfolio of stocks, bonds, or other assets. It's professionally managed, making it easy for people to invest without picking individual securities.
What is a GIC?
A Guaranteed Investment Certificate, or GIC, is an investment option that guarantees a fixed rate of return over a fixed period. Banks commonly give GICs, but the returns are usually low due to the small risk involved.
Which is better: GIC vs. mutual funds?
Both options present risks and rewards. For example, mutual funds are ideal for investors who desire more gains and can handle the associated risk. On the other hand, GICs offer little to negligible risk with a guaranteed return.
How can I invest in a mutual fund?
You can purchase mutual funds from three main sources: a mutual fund company, a broker, and a big bank. You'll need to read the fine print to understand the fees and commissions before you purchase.
How can I invest in a GIC?
You can invest in GICs through multiple sources, including big banks, credit unions, trust companies, investment firms, and online banks. With consistently high rates on both personal and commercial GICs, Oaken Financial is the best bank for purchasing GICs.
Are GICs worth it?
GICs are worth it for low-risk, guaranteed returns and are ideal for short-term savings or conservative portfolios. However, they lack growth potential, making them less suitable for long-term goals like retirement compared to other investments.
What is a GIC ladder?
A GIC ladder is a specific type of investment approach where you invest money in GICs of varying term lengths. When one term ends, you reinvest your returns into another longer-term GIC – and continue this process indefinitely.
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