Comparing GICs and mutual funds

Starting to explore ways to invest and secure your future? Great news! Now, let’s talk about your options.

Whether you’re saving for your next trip, planning for a comfortable retirement, or just want to nurture your savings, you need a balanced investment strategy. This approach will put you in a better position to achieve your financial goals and act quickly if the market changes.

There are so many investing options in today’s market, and finding the right one for your goals can be difficult, confusing, and let’s face it: overwhelming.

In this article, we’re going to talk about two common investment options you will likely come across:

• GICs (also known as Guaranteed Investment Certificates or GICs)
• Mutual funds.

These are some of the most popular options out there that you can choose from. Both can be great savings tools, but what makes one unique from the other? Let’s dive in.

A GIC, is a cash investment where you deposit a certain amount of money into an investment account over a set period of time, earning fixed interest.

It can come in two forms: redeemable, which means you don’t have to wait until the end of the term to take out your money, and non-redeemable, where your money is locked in for a fixed duration. Depending on the type of GIC you purchase, interest can be paid to you annually, at the end of the term or sometimes even monthly.

Curious about the pros and cons of each? Check out our complete guide to GICs.

GICs are known as a reliable option to earn back your minimum investment and more, so many investors gravitate toward them for this reason.

1. Low-risk investments: They are designed to minimize risk and are well-suited for achieving your short or medium-term financial goals. GICs offer peace of mind and stability.
2. Short redemption periods: Depending on the type of term purchases, you can redeem your investment in as short as 30 days. This flexibility makes it ideal for any short-term needs you might have, like for your emergency funds or an upcoming expense.  
3. Research and time needed: Investing requires thorough research. With the many types of GICs available in the market, it’s best to take time and understand different types and their associated risks and returns.
4. Inflation risk: Depending on when you purchase your GIC or GIC, you may either keep pace with inflation or fall behind. In some situations, you could be ahead of inflation, but that’s very rare and not typically recommended for generating income.
5. Custom-built investments with an advisor: Our financial advisors will work with you in creating customized investment solutions that are tailored to your specific goals and risk tolerance. In short, you can have a build-your-own investment account suited just for you.

Everyone’s situation is different, so how do you know if GICs are the right option for you?

GICs are conservative investments. If you’re comfortable with minimal risk and want predictable returns, they can be a foundational part of your investing strategy. Also, if you’re risk-averse and prefer to avoid market fluctuations, GICs are a lower risk option than other investments.

GICs generally will give you a better rate of return than a typical savings account, and a much better rate than a chequing account. If you're saving for an emergency fund or for a vacation in the next couple of years, GICs provide a secure place to park your money. Just be sure you choose a redeemable or non-redeemable GIC depending on your goals.

Speaking of saving, let’s say you’re saving for a specific purpose within a year, such as buying a new phone, paying off a car loan, or building up your rainy-day fund proactively. A short-term GIC is a proactive choice. On the other hand, if you have a goal in mind that will take 5 years or longer to achieve—such as paying for your child’s wedding, taking a once-in-a-lifetime trip overseas, or starting a side-business—a medium-term GIC provides a balanced approach.

Mutual funds are investments that pool money from many different people and invest them for specific objectives, which is why they’re called mutual funds. They’re managed by mutual fund managers, who work to distribute pooled funds across stocks, bonds, and other securities

Unlike GICs, mutual funds carry much more risk with investment.

1. Longer term focus: Mutual funds are considered longer-term investments; investors make contributions with the expectation of holding the fund for an extended period, allowing it to possibly grow over time. However, they also carry the risk of your investment fluctuating in value due to market downturns. Many investors buy mutual funds in Registered Retirement Savings Plans (RRSPs), and cash them out as Registered Retirement Income Funds (RRIFs) when they are ready to retire.
2. Set-it-and-forget-it: If you prefer a more hands-off approach to investing, mutual funds offer some peace of mind and convenience. This is especially appealing to busy people who don’t want to get into the nitty-gritty of investing. Once you’ve chosen a fund, you can leave the details to the day-to-day to the professionals.
3. Portfolio balancing: Fund managers are there to keep on top of market trends and adjust them where needed. When you purchase a portfolio of funds, the fund managers take care of rebalancing to maintain your desired asset mix (e.g. 50% equities and 50% bonds).
4. Management Fees: Speaking of leaving it to the pros, fund management doesn’t come for free. Mutual funds charge management expense ratios, or MERs, to cover the cost of managing the fund and other operational expenses. MERs typically ranges around 2.5%, depending on the fund’s complexity and the level of active management needed.
5. Market conditions and fees: Even during market downturns, you are still responsible for paying the fund manager’s fees. This is essentially important to consider when considering mutual funds.

Want to dig in more into what mutual funds are? Check out our complete guide to mutual funds.

If you're wondering “Is a mutual funds the right investment option for me?”, we can help you decide.

Mutual funds are more appropriate for those who are willing to take on some risks to see returns. If you’re a more risk-averse investor, a mutual fund is probably not going to let you sleep at night. A risk tolerance assessment will determine how much risk you’re comfortable with.

If you’re always on the go, convenience matters. With mutual funds, you don’t need to stress out on actively researching individual stocks or bonds. Instead, you can choose a fund that aligns with your investment goals and let the professionals handle it for you.

If you’re willing to let your investment accumulate contributions for 5, 10, 15, 20 years or even longer, a mutual fund could possibly see returns when you are ready to cash it out.

Both GICs and mutual funds are investing options that typically don’t require you to have advanced investing knowledge, though some funds do. Here is where they share some similarities:

Both investment options offer the potential for returns on your investment. In a GIC, the interest rate you’ll earn after your chosen term period is predetermined based on posted interest rate. In a mutual fund, with it being invested in a diversified portfolio of stock, bonds, or other securities, the returns depend on the performance of these assets.

Both options can be held within registered accounts such as in a Tax-Free Savings Accounts (TFSA) or Registered Retirement Savings Plans (RRSP). These accounts offer tax advantages such as tax-free growth or tax deferral.

You can choose based on your preferences and risk tolerance. For GICs which are considered low risk, your principal is protected, and you earn a fixed interest rate. Mutual funds, on the other hand, vary in risk—you can either invest conservatively or take higher risk.

Remember: While both investment options have similarities, you must be aware of what makes them different and unique. GICs are more predictable but offer lower returns, while mutual funds provide potential for higher return but come with market risk that could possibly result in negative returns.

Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc.