GICs and mutual funds 101: What you need to know as an investor

Whether you're investing for retirement or putting money aside to save for a down payment, you want to make sure that your financial plan has the right mix of investments to help you reach your goal. That right mix of investments will depend on your goals, your risk tolerance, and your time horizon for when you will need the funds.

Two of the most common investment options in Canada are mutual funds and guaranteed investment certificates (GICs). We break down these two popular options and how they work. 

A Guaranteed Investment Certificate (GIC) is a low-risk, secure investment vehicle where 100% of your original investment is guaranteed, but you're still able to earn interest at a fixed or variable rate over the life of your investment. While in a GIC, your money is protected through the Canada Deposit Insurance Corporation (CDIC).* GICs are a bit like savings accounts because they have such low risk but unlike many savings accounts, you usually have to agree to an investment term during which you do not take the money out. GIC terms can range from 30 days to 10 years. However, there are also cashable and redeemable GICs that allow you to take money out prior to the end of your term without penalty.

Generally, the longer GIC term length you agree to, the more interest you'll earn, but even with longer terms the interest earned on GICs tends to be relatively low since they are a low-risk investment. However, because of the low risk involved, they can be the great way to invest for short- or medium-term savings goals.

There are several types of GICs with different interest rates , including cashable GICs, redeemable GICs, market-linked GICs, and non-redeemable GICs. You can hold them in non-registered accounts or registered accounts, such as registered retirement savings plans (RRSP), tax-free savings accounts (TFSA), or registered retirement income funds (RRIF).

Mutual funds are investments that pool money from many investors to buy stocks, bonds, short-term money market instruments or other securities. They're managed by portfolio managers who use their experience and training to make choices about which investments to hold and when to buy and sell the fund's investments. One of the benefits of mutual funds is that they diversify your risk by distributing your money over a range of securities, geographies, sectors, asset classes and more. This means that if one investment underperforms, that underperformance can potentially be made up by other investments in the fund's holdings.

By investing in a mutual fund, you're able to buy a number of securities which you wouldn't necessarily be able to afford if you were purchasing them on your own. Unsure which mutual funds to choose? It will depend on your unique investment goals and preferences. A Scotiabank advisor can work with you to create a customized financial plan complete with investment recommendations that may include mutual funds that align with your goals, time horizon and risk tolerance.

There are a number of different types of mutual funds, including cash equivalent funds, income funds, balanced funds, equity funds, and Portfolio Solutions.

For the benefit of having your investment professionally managed, you pay a mutual fund fee, also known as a Management Expense Ratio (MER), that ranges depending on the type of fund. This covers the cost of expert advice from your advisor, taxes, operating expenses, and the investment management fee, which pays for the cost of professional fund management.

GICs can be good investments for anyone at any stage of their lives, but they are optimized for short-term and medium-term financial goals. For example, if you are saving for a car, vacation, or towards an emergency fund and have an investment time horizon of less than 3 years, a GIC is a great choice. Similarly, if you are saving for a down payment for a house, a major home renovation or another financial goal which has a time horizon of between 3 to 5 years, a GIC could be a good choice for you.

However, whether you should invest in a GIC will depend on your personal income, timeline, and goals. Your best strategy is to speak to an advisor about how to create a financial plan that works for you.

Mutual funds could also be a potential investing option at different stages of your life. There is a large range of mutual fund options that can work with different investment strategies and risk tolerance levels. In general, mutual funds are best for medium to long term goals. If you're saving for a financial goal with a medium 3-to-5-year time horizon, an advisor can help you find the right solution for you. 

Similarly, if you are saving for long-term goals with time horizons of over five years like for retirement, funding your child's education, or saving up for a cottage or vacation home, an advisor can match you with the right investment to help you achieve your financial dreams.

If you're asking yourself, “Should I invest in GICs or mutual funds?" remember that there's not one answer. Whether GICs or mutual funds or both is right for you depends on your personal circumstances.

Ready to start investing? A Scotia advisor can help you through the process of setting financial goals, creating customized investment strategies, routinely reviewing your investments, and evaluating financial plan.