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Published April 19, 2022

GICs vs. Mutual Funds: How to Choose

GICs and mutual funds differ in terms of potential risk and reward, but access to your money, fees and tax implications should also be considered when choosing between them.

When it comes to saving and investment options in Canada, there are a number of strategies and products to choose from.

Two beginner-friendly options are guaranteed investment certificates, or GICs, and mutual funds. Each comes with its own level of potential risk and reward.

When it comes to GICs vs. mutual funds, deciding which is right for you depends on your personal risk tolerance, what you’re willing to pay in fees, and the type of return you’re hoping to get on your investment.

» MORE: How to use a guaranteed investment certificate

What is a GIC?

Guaranteed investment certificates are one of the lowest-risk investment options available to Canadians. Essentially, GICs work like high-interest savings accounts, but with more rules and the potential to earn an even higher interest rate.

GICs are available for terms of 30 days up to 10 years, during which time they earn a fixed rate of interest. You choose your term, and agree for your money to be inaccessible for that entire length of time. When the term is up, you’re guaranteed to get back your original deposit plus growth at the agreed-upon interest rate.

What is a mutual fund?

A mutual fund is also a type of investment, but it doesn’t guarantee a return on your investment like a GIC does.

A mutual fund is a pool of stocks, bonds and other investments grouped together and managed by a financial advisor.

Mutual funds allow you to buy into multiple investments so you can own a diverse mix; typically, there are 100 different securities in a mutual fund.

» MORE: When is a GIC investment worth it?

How are GICs and mutual funds different?

When deciding whether to invest in GICs or mutual funds it’s important to be aware of how their differences may impact your experience and outcomes.

Risk and return

Mutual funds are traded on the stock market, which means you could see gains or losses. That being said, mutual funds are much more diversified and the potential gains could be higher than what you would get from a GIC.

GICs are not traded on the stock market; even if you choose a market-linked GIC, you won’t lose your original investment — you’re guaranteed to get it back.

Accessibility

With a GIC, your funds are locked away for a predetermined amount of time and any early withdrawal results in penalty fees.

Mutual funds are not locked away and are much more accessible should you need to withdraw some or all of your money, though there may be tax implications for doing so.

Fees

GICs do not have any direct fees, which sets them apart from other types of investments. That said, there still may be transfer fees involved if you move your registered account with GICs to another financial institution. Also, if you withdraw early, you will likely lose some or all of the earned interest and you may pay a fee.

Mutual funds, on the other hand, can be quite expensive, as you may need to pay management fees, sales charges, operating costs and commissions.

Taxes

GICs and mutual funds are taxed differently when held in non-registered accounts. The interest accrued in a GIC is taxed based on your marginal tax rate. The gains earned on mutual funds are typically capital gains or dividends, which aren’t taxed as heavily as marginal tax.

How are GICs and mutual funds similar?

Both GICs and mutual funds can be held in either registered or non-registered accounts. There are also several options for both types of investments depending on your preferred level of risk.

For example, you may choose a market-linked GIC where the interest you earn will depend on the stock market, for higher potential gains (or losses). Or you could choose a money market fund, which invests in lower-risk, short-term investments that may be more stable than typical mutual funds.

» MORE: Registered vs. non-registered GICs

How to choose between a GIC and a mutual fund

When considering GICs vs. mutual funds, consider your goals for the money and how much risk you are willing to take.

Before investing, consider what you are saving for and how quickly you will need that money, such as for retirement in 30 years or buying a house in four years.

Keep in mind that GICs vs mutual funds doesn’t have to be an either/or decision: Many investors choose to have both GICs and mutual funds in their diversified portfolio.

About the Author

Hannah Logan
Hannah Logan

Hannah Logan is a writer and blogger who specializes in personal finance and travel. You can follow her personal travel blog EatSleepBreatheTravel.com or find her on Instagram @hannahlogan21.

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