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GIC vs bonds: Which investment is better?

Compare GICs vs bonds to learn which investment is the best fit for your financial situation. 

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By

Claire Horwood

Updated

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Government-issued bonds and Guaranteed Investment Certificates (GICs) are different types of investment products that carry different levels of risk. GICs protect your principal investment and automatically insure any deposit you make. Bonds are higher-risk investments that offer the potential for higher returns on interest and a higher selling price based on what interest rates are doing.

GIC vs bonds: Which offers better returns?

It can be difficult to say whether GICs or bonds offer better returns. Typically, GICs are a safe bet if you’re looking to protect your principal investment and get a fixed interest rate between 1% and 3% on the total amount you invest. You can also invest in a variable rate product that offers rates based on the performance of the stock market.

Bonds are a bit different in that they’re more liquid and offer variable rates of interest based on whether the bond is corporate, municipal or federal. If you want to sell them before your term is up, their value is linked to what interest rates are doing (which makes them more volatile). They also aren’t insured, which makes them extra risky because they depend on the ability of the issuer to repay the bond at maturity.

The length of your term for both types of investments will influence how much you’ll get back, with longer terms bringing in higher interest rates. But unlike a GIC, if you decide to sell a bond before your term is up, you risk losing part of your principal investment if interest rates are high.

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Which earns you more flexibility: a GIC or bond?

You’ll typically get more flexibility in your investment with a bond because it can be cashed in or traded at any time. That being said, the value of the bonds when you sell them is subject to what interest rates are doing. If they’re high, the value of your bond will be lower and you’ll lose money.

GICs are usually less flexible than bonds if they’re non-redeemable. For most GICs, you’ll be charged a penalty for early redemption and you might lose any interest you earned on your investment. Cashable GICs, on the other hand, will let you take your money out at any time without a fee.

Pros and cons of GICs

Pros and cons may vary based on the type of GIC you choose to invest in.

Pros

  • Low risk. GICs are low-risk investments that guarantee your principal investment.
  • Easily manageable. Once you put your money in, you don’t have to do anything with it until your term is up.
  • Decent return. Many GICs give a 1–3% return on interest, which can be higher than government-issued bonds.
  • No fees. There are no fees for depositing funds or buying new GICs.
  • Deposits are insured. Your money is insured (up to $100,000) through the Canada Deposit Insurance Corporation (CDIC).
  • Protected from market fluctuations. If you choose a fixed interest rate, your savings will earn the same level of interest even if the market is performing poorly.
  • Low minimum investment. GICs can be opened with investments as little as $100.

Cons

  • More difficult to cash. Non-redeemable GICs can be difficult to take out once you put your money in and you may have to pay a fee or penalty to access funds early.
  • Low rate of return. Fixed rate GICs can give a lower rate of return than market-linked products if the stock market is doing well.
  • Unable to cope with inflation. GICs offering a long-term fixed rate may not keep up with inflation, causing you to lose money.
  • Interest subject to taxation. Any interest you earn will be taxed unless you hold your GIC in a registered account like a TFSA or RRSP.

Pros and cons of bonds

You will typically have more security and less risk with a government or municipal bond. Corporate bonds can be more risky to invest in, especially when they don’t have a AAA credit rating.

Pros

  • Principal is guaranteed. Much like GICs, bonds give you a fixed rate of interest and return your principal at maturity.
  • More flexible. You can cash in your bonds at any time without incurring a fee, although you may have to sell them at a loss.
  • Rated by credit agencies. Most bonds are rated by credit agencies to show how likely it is that your issuer will pay you back the money you invest.
  • Can be sold at a profit. If interest rates go way down, you may be able to sell your bonds at a profit before they mature.

Cons

  • More volatile. Bond values are tied to interest rates and they tend to fall when interest rates go up. This only matters if you need to sell your bonds before they mature.
  • Fixed returns. Investment returns are fixed and can be lower than what you might get with a GIC depending on your issuer.
  • No insurance. Bonds aren’t protected by insurance in the same way that GICs are.
  • Credit risk. If you invest in a bond from a company that isn’t doing well, you can lose all of your money (with no insurance to back you up).
  • Losses with inflation. You may lose money if inflation is on the rise because you’ll have less purchasing power with the interest you earn.
  • Sales can be difficult. Bonds can be harder to move before maturity because they depend on other investors being willing to buy them.

Bottom line

Bonds can be a suitable choice if you don’t mind a higher-risk investment with more liquidity. If you want to protect your principal investment and get insurance coverage on the amount you invest, you might be better off with a GIC. And if you want a combination of both? It could make sense to think about investing in a cashable GIC.

Frequently asked questions: GIC vs bonds

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