Clay Jarvis
Hannah Logan
Beth Buczynski
Guaranteed investment certificates, or GICs, and mutual funds are often considered beginner-friendly investment products. Each comes with its own unique risks and potential rewards.
When comparing GICs and mutual funds, consider 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.
GICs vs. mutual funds: Differences
When deciding whether to invest in GICs or mutual funds it’s important, 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.
At times of stock market instability, or when interest rates are rising, the reliability offered by GICs can become more attractive.
Accessibility
With many types of GICs, your funds are locked away for a predetermined amount of time. Depending on what kind of GIC you choose, early withdrawal can result in penalty fees or lower interest rates.
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. However, if you withdraw your money early, you will likely lose some or all of the earned interest and may have to pay a fee.
Mutual funds can be relatively expensive because 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.
Holding either investment in a registered account, like a tax-free savings account or registered retirement savings plan, will shelter you from having to pay taxes on your gains.
GICs vs. mutual funds: Similarities
Both GICs and mutual funds can be held in either registered or non-registered accounts. Each one comes in several varieties, allowing you to choose the one that matches your preferred level of risk and liquidity needs.
For example, you may choose a market-linked GIC where the interest you earn will depend on the stock market, which can result in higher potential gains—or none at all. Or you could choose a money market mutual fund, which invests in lower-risk, short-term investments that may be more stable than typical mutual funds.
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How to choose between a GIC and a mutual fund
When considering GICs vs. mutual funds, think about your goals for the money and how much risk you are willing to take. Get a sense of which direction the stock market and interest rates are headed, too.
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. Also consider whether you have room in your registered accounts, which can help you avoid being taxed on gains from these investments.
Keep in mind that the whole “GIC versus mutual fund” discussion doesn’t have to end with an either/or decision: Many investors diversify their portfolios by holding both GICs and mutual funds.
Frequently asked questions about GICs vs. mutual funds
No. A GIC is a single investment that pays a fixed or variable rate of interest over a predetermined amount of time. A mutual fund allows investors to invest in multiple asset classes, including stocks and bonds, but it does not guarantee a minimum return or impose any time constraints on the capital invested.
It all depends on how much risk you’re willing to take. If you aren’t comfortable with possibly losing your initial investment, a GIC that offers modest earnings is probably the better choice. With a mutual fund, you could lose money, but if the assets it holds outperform, you could earn far more than the interest paid out by even the most attractive GICs.
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