Mutual fund vs GIC: Which investment is better?

GICs and mutual funds are both investment products that can be held in registered or non-registered accounts, but they have several key differences. GICs are seen as safe investments as they provide a guaranteed return. Mutual funds offer the potential for higher returns, but they also come with a higher level of risk.

Whether you should invest in GICs or mutual funds — or both — depends on your investment goals as well as your risk tolerance. Keep reading for an in-depth GIC vs mutual funds comparison to help you decide where to invest.

What is a mutual fund?

A mutual fund is a professionally managed investment fund that pools money from multiple investors. A fund manager then invests that money in a portfolio of assets, such as stocks, ETFs and bonds, to generate returns.

When you invest in a mutual fund, you buy units of the fund and gain exposure to a diversified portfolio without having to select and manage individual investments yourself, making it ideal for beginners. The value of your investment changes based on how the fund’s assets perform. You can earn returns through increases in the fund’s value or income distributions, like dividends or capital gains.

Types of mutual funds

There are many types of mutual funds with varying levels of risk and potential returns, each designed to meet different investment goals, including:

• Equity funds: Invest primarily in stocks and aim to provide long-term capital growth.
• Bond funds: Invest in fixed-income securities, such as government and corporate bonds.
• Money market funds: Invest in short-term, low-risk investments such as treasury bills and commercial paper.
• Balanced funds: Hold a mix of stocks and bonds to provide a combination of growth and potential income.
• Index funds: Track a specific market index, such as the S&P 500, by holding similar investments.
• Dividend funds: Focus on stocks of companies that pay regular dividends.
• Sector funds: Invest in companies within a specific industry, such as technology or healthcare.
• Global or international funds: Invest in companies outside of the investor’s home country, providing geographic diversification and exposure to foreign markets.
• Target-date funds: Use a mix of investments that automatically becomes more conservative as the target year approaches, such as when an investor plans to retire.

Pros and cons of mutual funds

What is a GIC?

A guaranteed investment certificate, or GIC, is an investment that provides a guaranteed return on the money you deposit. How it works is simple: you deposit money with a financial institution for a set period of time, and in return you earn a fixed rate of interest.

GIC terms range from 30 days to 10 years, and in most GICs your money is “locked in” for the full term. If you want to access your funds before the term ends, you’ll pay a penalty.

Types of GICs

GICs also come in several different types, including:

• Fixed-rate GICs: Offer a guaranteed interest rate for a set term.
• Non-redeemable GICs: Lock in the investor’s money for the full term, with withdrawals generally not permitted until maturity.
• Redeemable GICs: Allow investors to access their funds before maturity, often at any time during the term. However, early withdrawals are usually subject to reduced interest rates.
• Cashable GICs: Allow investors to withdraw their money after a set waiting period, often 30 to 90 days, without a penalty. They typically offer lower interest rates than non-redeemable GICs in exchange for greater flexibility.
• Market-linked GICs: Provide returns based on the performance of an underlying market index.
• Foreign currency GICs: These GICs are held in a foreign currency rather than Canadian dollars, allowing investors to earn interest on foreign currency holdings or protect against potential changes in exchange rates.
• Registered GICs: GICs held within registered accounts, such as TFSAs, RRSPs, or RESPs, to provide tax advantages while offering the same guaranteed returns as other GICs.
• Laddered GICs: Involve spreading investments across multiple GICs with different maturity dates.

Pros and cons of GICs

GIC vs mutual funds: Which offers a better return?

A mutual fund offers the potential for better returns, but those returns aren’t guaranteed.

With a traditional GIC, your principal investment is protected, and you know you’ll get a fixed rate of return. Interest rates vary depending on the term length and financial institution, but one-year GIC rates of around 2.5%–3.5% were available at the time of writing. There are also market-linked GICs that offer varying returns based on the performance of a stock market index while typically protecting your principal.

With a mutual fund that tracks a stock market index or aims to outperform the market, your returns will vary based on how well your 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.

GIC vs mutual funds: Which is more flexible?

You’ll typically get more flexibility in your investment with a mutual fund because it can be cashed in or traded at any time. But mutual funds also charge management fees, and investments held in non-registered accounts may be subject to taxes on investment income and capital gains.

Traditional GICs typically lock in your money for a set term, and withdrawing early may result in penalties or lost interest. If you want extra flexibility, a cashable GIC allows you to take your money out at any time without a fee, but you’ll typically get a lower interest rate than a traditional GIC.

GIC vs mutual funds: Which has lower fees?

Mutual funds are more expensive to invest in than GICs. The first thing you should check is the fund’s management expense ratio, which covers the cost of having your fund professionally managed. Sales charges (also known as loads) may also apply when you buy and sell shares in a fund, and you should check the terms and conditions for details of any other transaction fees that may be charged.

On the other side of the coin, you don’t need to pay any fees to invest in GICs. The only cost to consider is whether you’ll be charged a penalty if you want to cash in your GIC before the term ends.

GIC vs mutual funds: Risk level

The level of risk depends on the specific type of GIC or mutual fund you choose. Traditional fixed-rate GICs are considered low-risk investments because they protect your principal and provide a guaranteed return when held to maturity. However, some GICs, such as market-linked GICs, offer returns tied to the performance of an underlying index, which means your returns may fluctuate based on market conditions, but your original deposit is still protected.

Mutual funds have a wider range of risk levels because they can invest in different types of assets. For example, equity funds that invest mainly in stocks can experience significant price fluctuations, while bond funds and market funds typically have lower volatility.

GIC vs mutual funds: Taxes

The tax treatment of GICs and mutual funds depends on the type of account they’re held in. In a non-registered account, GIC interest is generally taxed as regular income, meaning it’s added to your taxable income for the year. This can result in a higher tax rate compared with some other types of investment income.

Mutual fund earnings are taxed based on the type of income they generate. Interest income is taxed as regular income, while eligible dividends may qualify for a dividend tax credit and only 50% of capital gains are taxable.

Holding either a GIC or mutual fund in a registered account, such as a TFSA or RRSP, can help reduce or defer taxes.

GIC vs mutual funds: Which is better?

The better choice depends on your financial goals, risk tolerance and investment timeline. Mutual funds may be a better fit if you’re comfortable with market fluctuations and want the potential for higher long-term returns. However, your investment can lose value, and fees can reduce your overall returns.

GICs may be better suited for investors who prioritize safety and predictable returns. They protect your principal and offer a guaranteed interest rate, but they generally provide lower returns and may limit access to your money during the term.

If you want a balance between growth potential and security, a market-linked GIC may be worth considering, as it typically protects your principal while offering returns tied to market performance.

When to consider investing in a mutual fund or GIC

A mutual fund could be a good idea if you’re targeting long-term capital gains, such as if you’re saving for retirement or to put your kids through college. You’ll need to have a reasonable risk tolerance and be willing to ride out any market fluctuations.

GICs are better suited to shorter-term financial goals, such as if you’re saving for a house deposit or a vacation. They’re a low-risk investment option and provide a secure return, but just remember that many GICs won’t let you access your funds before the end of the term without paying a penalty.

Bottom line

If you want a low-risk investment with a guaranteed return, a GIC could be a good choice. Mutual funds are better suited for investors who are willing to absorb more risk in return for more earning potential. Of course, this doesn’t have to be a “one or the other” situation, as GICs and mutual funds can both be included in a diversified portfolio.

Ultimately, the right type of investment for you depends on your goals and timeframe, so compare your options before deciding where to invest your money.

Frequently asked questions

• How are mutual funds different from GICs?

  Mutual funds gather contributions from many different investors and choose investments based on professional market analysis. You need to pay fees for this service and your principal investment isn't guaranteed.

  GICs are more like savings accounts that pay fixed interest rates on the money you deposit (unless you go with a market-linked product). They offer a guaranteed return on your principal investment and are typically locked in for a specific term, making it difficult to access your funds once they're invested. Provided you invest in a GIC offered by a CDIC member, they're also insured up to $100,000.

• Is it a good idea to take on more risk in my investments?

  It depends on your financial goals, your risk appetite and your investment timeframe. Many investors use a combination of investment types to balance out the risk in their portfolios, so you may want to invest in mutual funds to target capital growth and use GICs to provide stable income and protect against market fluctuations.

• How can I get the best interest rates on a GIC?

  The simplest way to find the best GIC interest rate is to shop around. Compare rates and terms from a range of providers to find the highest available rate. Digital banks often offer higher rates than traditional banks because they have lower overhead costs, so they're worth considering when comparing your options.

• Can I apply for a GIC or mutual fund online?

  Yes, you can apply for a GIC or mutual fund online with the provider of your choice.

Written by

Tim Falk

Writer

Tim Falk is a freelance writer for Finder. Over the course of his 20-year writing career, he has reported on a wide range of personal finance topics. Whether you're investing in stocks and ETFs, comparing savings accounts or choosing a credit card, Tim wants to make it easier for you to understand. When he’s not staring at his computer, you can usually find him exploring the great outdoors. See full bio

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Co-written by

Rebecca Low

Writer

Rebecca Low is a writer for Finder. She has contributed to a range of digital publications, including income.ca, Indeed, and Expatden, writing on topics like personal finance, career development, and travel. See full bio