Dive deeper: Full guide to GICs
GIC vs bonds: Which is better?
Compare GICs vs bonds to learn which investment is the best fit for you.
GICs and bonds are both fixed-income investments with plenty of similarities — and some key differences. Both typically involve investing your money for a fixed period of time and earning a fixed interest rate, but they deliver different returns and offer different levels of risk. In this guide, we offer a GIC vs bonds comparison to help you decide whether you should invest in GICs, bonds or both.
What are GICs?
GICs (guaranteed investment certificates) typically provide a guaranteed return over a fixed period of time. You deposit money with a financial institution for a set period, called a term, and in return you earn a guaranteed rate of interest.
The main benefit of GICs is that they provide a low-risk way to grow your money. Eligible deposits of up to $100,000 are insured by the CDIC, and you have the peace of mind of knowing that you’ll get your principal back plus a certain amount of interest.
Cashable and redeemable vs non-redeemable GICs
Most GICs are non-redeemable, meaning you generally can’t access your money before the end of the term. Some financial institutions may allow you to withdraw your funds early, though, for a fee.
If you want more flexibility, opt for a cashable or redeemable GIC instead. Cashable GICs typically allow withdrawals after an initial lock-in period of 30 to 90 days, while redeemable GICs may allow you to withdraw your funds at any time or after a shorter holding period. Since they offer more flexibility, cashable and redeemable GICs generally pay lower interest rates than non-redeemable GICs.
What are bonds?
Bonds are loans that you, the investor, provide to governments and companies for a fixed period of time. These governments and companies are known as bond issuers, and in return for the money you loan them, they’ll pay you interest. Interest is usually paid at a fixed rate, but variable-rate bonds are also available. And when the bond reaches maturity, you get your principal back.
Once you invest in a bond, its value will fluctuate based on interest rate movements. Falling interest rates cause bond prices to go increase, while the opposite occurs when rates rise.
Government vs corporate bonds
Bonds are typically divided into two main categories: government bonds and corporate bonds. Government bonds are issued by federal, provincial or municipal governments to fund public projects and operations. They’re generally considered lower-risk investments, so they tend to offer lower yields.
Corporate bonds are issued by companies to raise money for business activities like expansion or operations. Since companies have a higher risk of defaulting on their debt, corporate bonds usually offer higher yields to compensante for investors taking on more risk.
Dive deeper: Full guide to bonds
GIC vs bonds: Which offers better returns?
There’s no clear winner when trying to determine whether GICs or bonds offer better returns. Compare GICs and you’ll find that interest rates vary substantially based on the GIC issuer, type of GIC and the length of the term.
Bonds are a bit different in that they’re more liquid than GICs, while interest rates vary based on whether the bond is corporate, municipal, provincial or federal. If you want to sell bonds before the bond reaches maturity, their value is linked to what interest rates are doing (which makes them more volatile).
GIC vs bonds: Which is riskier?
GICs are generally considered lower-risk investments because they provide a guaranteed return and eligible deposits are insured by the CDIC. Bonds carry more risk because they depend on the ability of the issuer to repay the bond at maturity.
And unlike a GIC, if you decide to sell a bond before your term is up, you risk getting less than you paid for the bond if interest rates are high.
GIC vs bonds: Which is more flexible?
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 could 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 and redeemable GICs, on the other hand, will let you take your money out at any time without a fee — but they have lower interest rates.
GIC vs bonds: Taxes
Unless you hold your GICs or bonds in a registered account, like a tax-free savings account (TFSA) or registered retirement savings plan (RRSP), the interest you earn will be taxed as regular income. The difference between the two investments is that bonds may also generate a capital gain or capital loss if you sell them before maturity for more or less than you paid.
Pros and cons of GICs
Pros
- Low risk. A GIC is a low-risk option that guarantees 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.
- No fees. There are no fees to pay when you invest in GICs.
- Deposits are insured. Your money is insured (up to $100,000) through the Canada Deposit Insurance Corporation (CDIC).
- Low minimum investment. GICs can be opened with as little as $100.
Cons
- More difficult to cash. With a non-redeemable GIC, you’ll pay a penalty if you need to access your money early.
- Low rate of return. Other investment types might come with more risk than GICs, but they also offer the potential for higher returns.
- Unable to keep pace with inflation. GICs offering a long-term fixed rate may not keep up with inflation, causing you to lose money.
- Interest is taxed. 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
Pros
- Fixed returns. Much like GICs, bonds give you a fixed rate of interest and return your principal at maturity.
- More flexible. You can sell your bonds at any time without penalty, 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 drop, you may be able to sell your bonds at a profit before they mature.
- Bond funds. You can also gain exposure to bonds through mutual funds and ETFs.
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, but it’s a factor worth considering.
- Fixed returns. Investment returns are usually fixed, and other types of investments offer the potential for higher returns.
- 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 sell before maturity because they depend on other investors being willing to buy them.
Bottom line
GICs provide a low-risk investment option, guaranteed returns and the peace of mind of insurance coverage. Bonds are also a relatively low-risk choice, providing more liquidity but without the benefit of insurance coverage.
So, should you invest in bonds or GICs? As is often the case when choosing investments, it’s not necessarily a matter of choosing one or the other. GICs and bonds can both be an important part of a diversified portfolio, so compare a range of investments before deciding which ones are right for you.
Frequently asked questions: GIC vs bonds
Sources
More resources on Finder
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