GIC vs mutual funds: Which investment is better?

Compare GICs vs mutual funds to find out which investment best suits your financial needs. 

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Couple looking at a comparison of a GIC vs. mutual funds online.

Mutual funds and GICs are both Canadian investment products that carry different levels of risk. GICs guarantee your principal investment and are protected by insurance, which means they can help balance out risk in your portfolio. Mutual funds are higher risk investments but offer the potential for higher returns based on the performance of the stock market.

Compare GIC rates

Name Product Term Interest Rate Minimum Investment Insurance Coverage
Meridian 18 Month Non-Redeemable GIC
18 months
2.4%
$100
up to $250,000
Earn returns at 2.4% with a low minimum investment.

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Which offers a better return: a GIC or mutual fund?

It can be difficult to say whether Guaranteed Investment Certificates (GICs) or mutual funds offer better returns. GICs protect your principal investment and tend to offer a fixed rate return between 1-3% on the total amount you invest. You can also invest in market-linked products that will protect your principal, with interest rates fluctuating according to the performance of an index in the stock market.

Mutual funds are a bit different in that they’re linked to the aggregate performance of a package of securities (typically stocks and bonds) in the market. This means that your return will vary based on how well your mutual fund performs as a whole. If it does well, you could stand to make much more than you would with a GIC. But if the stock market crashes or your mutual fund performs poorly, you could lose money, including your principal investment.

The bottom line is that if you don’t mind a higher-risk investment with the potential for a better return, then a mutual fund could be a suitable choice. If you want to protect your principal investment and get a guaranteed return on interest, 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 market-linked GIC.

Which earns you more flexibility: GICs vs. mutual funds?

You’ll typically get more flexibility in your investment with a mutual fund because it can be cashed in or traded at any time. That being said, mutual funds also charge annual fees and you may have to pay taxes every time your fund sells shares and redistributes capital gains.

GICs can also offer flexibility if they’re cashable, which means that you can take your money out at any time without a fee. Non-redeemable GICs, on the other hand, are a little bit more strict about when you can take cash out and they typically charge a penalty for early redemption.

Pros and cons of GICs

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

Pros

  • Low risk. You’ll get a guaranteed return of your principal with either a fixed or market-linked return on interest.
  • Low maintenance. Once you lock your cash away in a GIC, you don’t have to do anything with it until your term is up.
  • Low minimum investment. GICs can be opened with investments as low as $100.
  • 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.
  • There are no fees. You won’t pay any fees unless you withdraw money from a non-redeemable GIC early.
  • Deposits are insured. Any money you put into your GIC (up to $100,000) is insured through the Canada Deposit Insurance Corporation (CDIC).

Cons

  • Less liquidity. Non-redeemable GICs don’t offer a great deal of liquidity, which means you may have to pay a fee or penalty to access your funds in an emergency.
  • Low rate of return. You will typically make less money with a fixed rate GIC if the stock market is performing well (although market-linked GICs can be more lucrative).
  • Unable to cope with inflation. Long-term fixed-rate GICs may have trouble keeping up with inflation, leading to an overall loss on your investment.
  • Interest subject to taxation. You’ll pay interest on any interest you make outside of a registered account like a TFSA or RRSP.

Pros and cons of mutual funds

Pros and cons may vary based on whether you have an actively managed fund or an index fund. Here are some of the most common pros and cons for both types of mutual funds.

Pros

  • Diversifies your investments. Mutual funds are spread out over a number of different investments to reduce overall risk.
  • Provides more flexibility. You can cash in your mutual funds at any time without penalty.
  • Based on industry expertise. Fund managers are trained to help you get the most bang for your buck on your investments.
  • Less time-consuming. You won’t need to spend hours selecting and monitoring your investments because this is handled for you by your fund manager.
  • Dividends can be reinvested. You can reinvest the money you make on your investment into more mutual funds to avoid paying fees for new contributions.
  • Varying levels of risk. You have the option to choose a fund with a high level of risk (and potential reward), or you can opt for a fund that’s less aggressive.

Cons

  • Lack of control. You won’t be in charge of managing your investments directly, so it can be difficult to keep track of where your money is going.
  • Unpredictable taxes. Depending on the fund, you may be taxed every time your fund sells shares and redistributes capital gains.
  • Fees for transactions. You’ll end up paying an overhead cost for your fund to be managed, which can be as much as 1.5% of your fund (or 0.25% for an index fund).
  • Interest subject to taxation. Any interest you earn on your mutual fund is subject to taxation if the GIC is held outside of a registered fund.

Bottom line

GICs are a suitable option if you’re looking for a low-risk investment with a guaranteed return. Mutual funds are better suited for investors who are willing to absorb more risk in return for more earning potential. Find out more about how these products work and learn how to compare providers to find the best deal.

Frequently asked questions about GICs vs mutual funds

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