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GIC vs. Mutual Funds – Which One is Best for You?

Many times, people get confused when it comes to investments and especially when it comes to saving for retirement. In Canada, the options are not limited; you have plenty to choose your investment plan from. Though always decide your goals first and gauge where you stand financially at present before diving into the world of investments. GIC vs Mutual Funds is one such debate topic and it confuses people to choose one. So in this article, I will simplify it for you whether you should go for GIC or mutual fund and why. So let’s get started.

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What is a Guaranteed Investment Certificate aka GIC? 

GIC is associated with a bank in terms that you lend your money and get a GIC certificate from the bank stating that you have given them the money, the amount of the money, and the interest rate you will get in return. They are just like savings accounts but you get a better interest rate compared to it. 

These certificates provide a stable income for retirement at lower risk. They are also insured by the Canadian government which makes it a safe investment. The important thing here is that you need to keep investing and stay invested in the investment for a longer period of time if you want to build wealth out of your GIC. Canadian Deposit Insurance Corporation (GDIC) insures your GICs for up to $100,000.

Read: Do You Need Life Insurance in Canada?

What is a Mutual Fund? 

You would probably know about mutual funds. But for a simple understanding; suppose you want to buy stocks of company A and company B. But you can only afford to invest in one company given that the prices are high. In such cases, you can invest in a mutual fund. Here your money gets divided into small chunks and is invested in various stocks. It is not just limited to stocks, it can be bonds, gold, alternative assets, gold, etc. In short, a mutual fund is a pool of money being invested in various financial instruments. 

Note that the risk profile is quite high here but you also get better returns compared to GICs. Though, your money is not insured by the Canadian government here. Mutual funds are more diversified and they take less time because they can be for a short period along being long term. 

In GICs, your money is locked and if you want to redeem, you have to pay the penalty but that doesn’t apply to a mutual fund. Though still, it depends on whether you are buying an open-ended mutual fund or a close-ended mutual fund.

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How Does the Risk Profile Compare for GIC vs Mutual Funds?

This is a major element that differentiates the GIC and mutual funds. Guaranteed Investment Certificates provide a fixed rate of interest over a long period of time. It is better to stay invested for a long period if you want to get more returns. The return would not exceed a single-digit though. And the reason is that it doesn’t take risks, you just deposit your money, and earn the interest; it is just an elevated form of savings account. You have to take risks if you want to earn more returns and that’s where mutual funds enter. 

Mutual funds invest in the equity market, bond market, and event alternative investment; they are risky. Though you can take fewer risks even if you want to invest in a mutual fund because there are mutual fund investments available that invest in safe instruments such as Government Bonds, Municipal Bonds, and companies with stable financial statements. In this way, you can invest in mutual funds and even minimize your risk. If you are a risk-taker just like me, then you can invest in mutual funds that invest heavily in the equity market. In that way, you can earn more income over a period of time. 

Note: I strongly recommend you to take only the risk you can afford because there is no meaning in taking too much risk because just like you can get more returns you can also get higher losses. So, make sure that you diversify your investment, assess your risk appetite, and based on that make an investment decision.

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The Case of Inflation

Another difference in GIC vs Mutual Funds is the inflation rate. GIC investments are fixed interest returns and thus many times they do not cover increased inflation. For example, if your return is fixed at 2% and if the inflation rate is 2.3 % the earning that you get would be still less than the market value because the market price would be $2.3 but what you will earn is only $2. Getting the reference right?

Whereas that’s not the case with mutual funds because the return depends on the investment done by the mutual fund company. And most of the time it is over the inflation rate.

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How Do the Taxes Work for GIC vs. Mutual Funds? 

GICs

This is also an important aspect for investing in GIC vs Mutual Funds. Investment is not just limited to earning income but you will also have to pay taxes and fees for it. When it comes to GICs, there is no fee attached. There are only penalty charges on the early withdrawal of money which can hamper your return because you will be getting less income deducted by the penalty. 

Though you can invest in a cashable GIC or redeemable GIC in which there are no penalties attached and you can withdraw money anytime you want. But because you get the flexibility the interest that you get would be less than the normal GIC. You will be required to pay marginal tax on GIC outside of your registered account for any interest rate gains. 

Read: How Much Money Do You Need to Save for Retirement in Canada?

Mutual Funds

When it comes to Mutual Funds, there are higher charges and fees attached. An average management fee of around 2.28 % is charged on 75% of the Canadian Mutual Funds. While the percentage doesn’t seem that much but when you convert it into numbers it can be a lot. 

Also, note that this is an average amount, so the actual amount applied to your investment can be higher. If your gain is 6% but the fees are 5%, you will earn only a 1% return. Also here you have to pay the fees regardless of how the mutual fund performs. So even if your fund performs for just 1%, and if your fee is fixed at 5%, you will have to pay it even if it’s a loss for you. 

In addition to this management fee, mutual can also have transaction fees. You have to pay commission, sale changes, and charges on delayed services. The taxes on mutual funds can be fluctuating because of the dynamic investment structure that it holds. If you are invested in a non-registered account, you are required to pay taxes on the gains you get from the mutual funds. You also have to pay taxes on dividends or capital gains but compared to the interest, they are quite favorable.

Read: Tax For Self-Employed In Canada: How Much To Set Aside For CPP & EI?

The Bottom Line 

The investment world is quite vivid and large and the options are not limited to GICs and Mutual Funds. You can also invest in Exchange-traded Funds (ETFs), Index Funds, stocks, bonds, alternative assets such as gold or antiques. All you have to do is decide what is your financial goal, what is your financial position at present, and what is your risk-taking appetite. 

You can also consult a financial adviser to make decisions and guide you on the process. Understand that there is no meaning in taking more risk than you can afford; choose wisely, invest yourself in your investment and only then take a step ahead. All the best!

Read: How To Create Passive Income? Top 10 Ideas!


Devanshee Dave

Devanshee is a staff writer at YourFirst.ca. She is a finance enthusiast and has completed her Master’s degree in Mass Communication & Journalism. She is currently pursuing CFA (Chartered Financial Analyst) and has worked as a journalist in a local business newspaper, multiple start-ups as well as finance and economy-related online media houses.

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