Mutual Funds vs. GICs

If you live in Canada and are trying to decide whether you should invest in a mutual fund or a guaranteed investment certificate, understanding the fundamental differences between the two can help you decide. When evaluating any investment, one thing you should always consider is the level of risk you’re willing to take with your money.

GIC Essentials

Purchasing a GIC is similar to depositing money into a bank account, except for the fact that the interest you earn is subject to the terms of the particular certificate you choose. You may generally purchase a GIC with as little as $500, but in order to get the most interest out of your GIC, you’ll need to refrain from withdrawing money for a specified period of time.

You have access to the funds invested in a GIC if you fall on hard times or have an emergency. Withdrawing funds early from a non-redeemable GIC will result in a penalty. There is no penalty, however, for cashing a redeemable GIC early.

Terms vary by financial institution, but you may generally invest for periods as short as six months or as long 10 years, with higher rates of interest paid on deposits for longer durations.

You may hold GICs as part of your tax-deferred retirement plan, such as an RRSP.

Mutual Fund Basics

Mutual funds are managed by investment companies, which pool money from a large number of investors and choose investments based on professional market analysis and research. Unlike a GIC, your investment in a mutual fund will require the payment of fees and commissions to the fund manager, reducing your earnings.

One of the main reasons investors choose to invest in a mutual fund rather than purchase individual stocks or bonds is diversification, which would be more difficult and expensive for investors to achieve on their own.

Investment Risk

There is a difference in the level of risk you take when investing in mutual funds rather than a GIC. With the latter, there’s no risk because the Canadian government insures the funds you invest. In contrast, the value of a mutual fund fluctuates depending on market conditions and the types of securities in which the fund invests. For example, if the mutual fund you choose focuses on stocks within a specific industry, the value of your mutual fund investment is dependent on the profitability (or loss) of that industry. A well-diversified mutual fund, however, reduces risk.

Investment Options

Many types of GICs are available. You may choose a non-redeemable GIC and earn higher rates of interest than you can earn on GICs that are redeemable. You may also choose a GIC with a fixed rate of interest or one that offers a variable interest rate or that’s benchmarked to the stock market.

Options are also available when choosing a mutual fund. You may select a fund that focuses its investments on corporate stock, a fund that purchases only bonds, a fund that invests in short-term liquid investments, such as government notes, or a fund with portfolios that hold all kinds of securities.