GICs vs Mutual Funds – Comparing Two Popular Investments

WRITTEN BY Dan Kent | UPDATED ON: May 21, 2024

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post. Stocktrades Ltd will run advertisements on our posts. These advertisements do not represent an endorsement by us.

When considering different investment opportunities, Guaranteed Investment Certificates (GICs) and mutual funds are often cited as prevalent options.

What are GICs? A GIC is a type of investment that offers a guaranteed rate of return over a fixed period, making it a low-risk investment. In fact, if the GIC is under $100,000, it is virtually a risk-free investment, as for the most part, they will have CDIC coverage, regardless of whether you are with a major institution or a smaller online bank.

On the other hand, mutual funds are made up of a pool of funds collected from many investors that are managed by professionals and invested in a diversified portfolio of stocks, bonds, or other securities.

They are far from low risk, as they expose an investor to the equity markets, which are known to be volatile.

Knowing the difference between GICs and mutual funds is critical

Understanding the differences between these two investment vehicles is crucial for investors who aim to align their portfolios with their financial goals and risk tolerance. 

GICs provide the security of capital preservation and a predictable return rate, which could appeal to conservative investors or those nearing retirement. 

Contrastingly, mutual funds offer the potential for higher returns through exposure to a broader range of assets, albeit with higher risks and the likelihood of volatility in the market.

Investors must also weigh other factors when choosing between GICs and mutual funds, such as fees, liquidity, and how each aligns with their investment horizon. 

GICs often come with locked-in terms where funds are inaccessible until maturity without incurring penalties, while mutual funds provide more flexibility to buy or sell shares at the current market value. 

Let's dive into both of these investments so you can see which one is right for you.

Let's talk about GICs

Guaranteed Investment Certificates (GICs) are a staple in the Canadian investment world, especially now that we're in a higher-rate environment. They offer a blend of security and guaranteed returns in exchange for low liquidity and lower long-term returns than the stock market. 

This section will highlight GIC fundamentals, their types, GIC interest rates, comparisons with high-interest accounts and bonds, and relevant entities.

Types of GICs

There are several types of GICs, including:

  • Cashable/Redeemable GICs: These allow investors to access funds before the maturity date without significant penalty fees.
  • Non-Redeemable GICs: Offer higher interest rates but lock in your money for the term's duration.
  • Market-Linked GICs: These provide returns based on the performance of the linked market or index, with the principal still being guaranteed.

Interest rates and terms

GICs are often fixed rates, meaning you will be paid a set amount of interest that will not fluctuate as GIC rates go up or down. However, it is possible to get a variable rate GIC as well, which will typically go up and down based on the issuing bank's prime rate.

In addition to the type of rate you have, you will have to have a maturity date as well. GICs range from short-term, which can be considered anything within a year, to long-term, which can be five years or greater.

What type of term you choose and what rate you choose is completely up to you as an investor. In my own personal experience, I see more and more people utilize GICs for short-term rather than a long-term investment. 

This is because of the liquidity element of the GIC. A 5+ year term means you'll have your money locked up in the case of a non-redeemable for 5 years or more.

Is a GIC Better than a high-interest savings account?

Comparing GICs to high-interest savings accounts depends on an investor's liquidity needs and time horizon. 

For the most part, you will get a much higher rate of interest on a GIC versus a high-interest savings account. However, you will have complete liquidity when it comes to a high-interest savings account, whereas with a GIC, at least in order to lock up the best rates on a non-redeemable, you will have zero liquidity.

You can tuck emergency cash away in a HISA. If your car breaks down, you can simply pull that money out and make repairs. On the other hand, with a GIC, the money is locked away until maturity, and you will not be able to access it.

Weighing these types of situations will really help you in comparing a GIC vs. other investment methods.

Is it better to buy bonds or a GIC?

The answer is not so easy. GICs are generally safer with insured principal, while bonds can offer potentially higher yields but with greater risk, particularly with fluctuating interest rates.

Why? Well, with a GIC, your initial investment does not change, whereas the value of your bond is going to change based on market fluctuations.

Keep in mind I'm simply talking about what someone is willing to pay for your bond. Your underlying capital is still, for the most part, guaranteed with a high-grade bond. Yes, there is still a chance of default risk, but it is relatively rare with blue-chip companies.

So, much like a GIC, you should get the principal payment back from your bond purchase on the maturity date. However, throughout the duration of you holding that bond, its value could go much higher or much lower, depending on the current interest rates.

As rates fall, newly issued bonds will become more attractive, boosting their share price. As rates increase, newly issued bonds will become less attractive, causing their share price to fall. This is all in an effort to normalize the "yield" of the bond with the current environment.

Choosing between bonds or GICs depends on factors like the interest rate environment, investment time horizon, and risk tolerance. If you can withstand market fluctuations, you may like the higher yield offered by bonds.

Can you lose money on a GIC?

A GIC is a secure investment offered by Canadian institutions where the principal investment is guaranteed, meaning investors generally cannot lose money.

Guaranteed returns make them a low-risk investment, protected by entities like the Canada Deposit Insurance Corporation (CDIC), which insures eligible deposits up to a certain limit in the event of the financial institution's failure.

The only way you could theoretically lose money on a GIC is if you purchase one that was over and above the insurance coverage (typically $100,000 per client) and the institution were to go insolvent. You'd be covered up to that $100,000 but lose the rest.

In this case, you could look to spreading your capital out to multiple institutions.

Let's talk about mutual funds

Mutual funds present investors with opportunities for growth, diversification, and management of their capital. However, that management does come with a fee, and they've been heavily scrutinized over the last decade as more and more investors turn to ETFs.

But that's for another article. This section explores the intricacies of mutual funds, from basic concepts to the nuances of fund transferability.

Basics of mutual funds

Mutual funds are investment vehicles that pool capital from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. 

Each shareholder participates proportionally in the gains or losses of the fund. Mutual funds can be categorized by their principal investments as money market funds, bond or fixed income funds, stock or equity funds, and hybrid funds.

A mutual fund is nothing more than a legal structure of an investment fund. While mutual funds pool investor capital and buy assets with it, exchange-traded funds on the other hand, another type of legal structure, buy the underlying assets in the ETF and then sell proportional units on the open market.

This gives ETFs more liquidity than mutual funds, as you can typically sell them on the open market on the same day. Mutual funds, however, often are only liquidated at the end of a trading day.

Fees and expenses

Investing in mutual funds involves costs like management fees, also known as the management expense ratio (MER), as well as possible sales charges or commissions. 

The MER is an annual fee that covers the costs of managing the fund, including paying the fund manager. Some funds also charge sales charges or commissions, which can be front-end (paid when purchasing the shares) or back-end (paid when selling the shares).

  • Management Fee: Typically ranges from 0.5% to 2.5% of assets annually.
  • Annual Fees: These may include trustee fees, operational costs, etc.
  • Sales Charges: These are either paid upfront (front-end load) or upon sale (back-end load).

Sales charges are becoming more and more rare these days as there are enough alternatives on the market that retail investors are simply refusing to pay them.

In addition to this, low-cost ETFs are putting a ton of pressure on mutual funds to continue to reduce fees. It's working thus far, but many mutual funds still carry fees that will no doubt take a huge bite out of your overall investment returns.

Assessing risk and returns

The risks and returns of mutual funds depend on the underlying assets. For instance, mutual funds that invest in stocks (equities) tend to be higher risk but also offer the potential for higher returns through capital gains. 

Bonds and GICs typically are lower-risk but offer lower potential returns. Investors must align their risk tolerance with the type of mutual fund they select.

Mutual funds that track a particular index (index funds), like the TSX, will often mimic the returns of that index before fees. Then, after fees are deducted, that would be an investor's return.

Switching from one mutual fund to another

Investors may switch from one mutual fund to another within the same fund family, usually without incurring additional sales charges. 

However, any capital gains realized from the sale of mutual fund shares may be subject to taxes.

Transferring mutual funds from one broker to another

Transferring mutual funds between brokers can be done typically without selling the shares, thus avoiding sales charges. 

I did this for someone recently, and the process was relatively seamless. You simply request the funds be transferred in kind, and in this day and age, it often only takes a week or two for a transfer to be completed.

Keep in mind that this action may incur transfer fees and could take some time to complete. It's crucial to ensure that the receiving broker accepts the transfer of the specific funds being held.

Comparing GICs and mutual funds

Let's make one thing very clear before starting this portion. GICs and mutual funds are two very different types of investments. Sure, you can get a mutual fund that may be a money market fund that contains GICs, but for the most part, they're nothing alike.

A GIC is a fixed-income investment that offers a guaranteed return from the bank for you giving them your money. They'll strategically pay you an interest rate that they know they can earn more on (called a spread).

A mutual fund, on the other hand, is a professional team of investors handling your money for you and investing it. You'll pay a fee annually for this.

Is a mutual fund better than a GIC right now? 

Overall, this is a difficult question to answer, as it is highly dependent on the investor. Generally, because mutual funds will have exposure to the stock market, they will outperform a GIC during periods of rising markets.

However, in down markets or for investors seeking a low-risk investment to protect their principal, a GIC is generally considered better than mutual funds. 

GICs guarantee the return on principal and offer fixed interest rates, providing a stable addition to one's retirement savings or portfolio.

It becomes hard to predict the market's movements over the short term. So generally, the longer time horizon (period of time) you have, the better off you'd be investing the money into the stock market.

Is a Mutual Fund Better Than a GIC 2023? 

Pretty much in any given market someone somewhere is wondering, is a GIC is worth it. Overall, this is a difficult question to answer, as it is highly dependent on the investor. Generally, because mutual funds will have exposure to the stock market, they will outperform a GIC during periods of rising markets.

However, in down markets or for investors seeking a low-risk investment to protect their principal, a GIC is generally considered better than mutual funds. 

GICs guarantee the return on principal and offer fixed interest rates, providing a stable addition to one's retirement savings or portfolio.

It becomes hard to predict the market's movements over the short term. So generally, the longer time horizon (period of time) you have, the better off you'd be investing the money into the stock market.

The advantages and disadvantages of a GIC

Advantages:

  • Guaranteed return (unless you cash out early)
  • Predictable
  • Principle is guaranteed
  • A wide variety of terms
  • easily purchased through your bank
  • Useful for risk-averse investors
  • Higher offerings now that rates are higher

Disadvantages:

  • No liquidity unless you buy a cashable GIC, which, in that case, you'll earn less interest
  • Historically, they have lagged the overall returns of the stock market
  • Some banks have high minimum amounts to get started
  • As rates fall, so too will new GIC rates, lowering the attractiveness

The advantages and disadvantages of a mutual fund

Advantages:

  • Exposure to the stock market, fixed-income market, or other niche investments without much work
  • Your money is professionally managed
  • Although not as liquid as a stock or ETF, it still has high liquidity in relation to GICs

Disadvantages:

  • Most mutual funds underperform their ETF counterparts
  • High fees can cost you hundreds of thousands of dollars over your investment career
  • Prone to the volatility of the stock market

Tax considerations of GICs and mutual funds

When evaluating GICs and mutual funds, investors should consider the different tax implications and how each investment functions within registered and unregistered accounts. 

Tax implications

GICs (Guaranteed Investment Certificates): The interest income from GICs is fully taxable at the holder's marginal tax rate. However, a GIC in an RRSP (Registered Retirement Savings Plan) or in a TFSA (Tax-Free Savings Account), the interest gains are sheltered from taxes until withdrawal in the case of an RRSP or entirely tax-free for a TFSA. So people should compare GICs and registered and non-registered accounts.

Mutual Funds: They often distribute taxable capital gains and dividends. If the mutual fund is held outside a registered plan, these distributions may result in a tax liability. However, depending on the makeup of the distribution, they can offer some tax-friendly forms of income.

Within a TFSA, all gains and income are tax-exempt. An RRSP defers taxes on capital gains and other income until withdrawal, typically during retirement when the individual may be in a lower tax bracket.

So, GIC or mutual fund? Which one should you choose?

When deciding between Guaranteed Investment Certificates (GICs) and mutual funds, it's vital to consider one's individual financial situation, investment goals, and risk tolerance. 

Assess your financial situation

Your financial stability and goals are pivotal in choosing the appropriate investment vehicle. GICs offer a stable investment with guaranteed returns, often desirable for those with a low-risk tolerance looking to preserve capital, and some might opt to employ a GIC laddering technique.

Mutual funds, on the other hand, maybe more suitable for investors seeking growth potential through exposure to the equity markets. 

A general guideline would be that if your time horizon is long and you are able to withstand the short-term fluctuations in the stock market, exposure to the stock market will result in higher returns than a GIC.

Is it better to invest in stocks or a GIC?

The choice between investing in individual stocks or GICs hinges on one's comfort with risk, the need for liquidity, and one's time horizon.

Stocks provide the potential for higher returns augmented by dividends and capital gains. However, short-term movements in the market can be devastating. 

During a market crash, it is not uncommon to see stocks trading at 40% or lower. Someone who panics and sells during this time may be making a costly mistake.

Conversely, GICs, especially cashable GICs, offer the security of a guaranteed return and might be preferable for conservative investors or those seeking a low minimum investment option within a non-registered account or a financial institution.