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Published November 4, 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, the fees involved and the potential tax implications should also be considered when choosing between them.

When it comes to 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 unique risks and potential rewards.

When it comes to comparing GICs and 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.

What is a GIC?

Guaranteed investment certificates are one of the lowest-risk investment options available to Canadians. You’re guaranteed to recoup your original deposit plus whatever you earn at a pre-determined interest rate.

GICs are available for terms of 30 days up to 10 years, during which time they earn either a fixed or variable rate of interest.

You choose your type of GIC and term and agree for your money to be inaccessible for that entire length of time. When the term is up, your money is returned and you’ll be paid out the interest earned.

What is a mutual fund?

A mutual fund is also a type of investment, but it doesn’t guarantee a return on your investment — or the return of your initial capital —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.

GICs vs. mutual funds: Differences

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.

At times of stock market instability, or when interest rates are rising, the reliability offered by GICs can become more attractive.

Accessibility

With a GIC, 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.

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. (There may be transfer fees involved if you move your registered account that holds GICs to another financial institution.) Also, if you withdraw 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 as marginal tax.

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, for 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.

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. 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.

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

    • Is a mutual fund the same as a GIC?

      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.

    • Which is better, a GIC or a mutual fund?

      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.

About the Authors

Clay Jarvis

Clay Jarvis is NerdWallet’s mortgage and real estate expert in Canada. Thus far, his entire professional writing career has revolved around real estate. Prior to joining NerdWallet, he was the editor and senior writer for four publications, including the leading website for the country’s mortgage industry, Mortgage Broker News. Clay has written 30,000-word examinations of Canada’s real estate investment market, interviewed the industry’s most powerful leaders and analysts, and has helped choose both the nation’s top realtors and mortgage brokers. He is based in Toronto, Ontario.

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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