Mutual fund vs GIC: Which investment is better?

GICs and mutual funds are both investment products that can be held in registered or non-registered accounts, but they have several key differences. GICs are seen as safe investments that provide a guaranteed return. Mutual funds offer the potential for higher returns, but they also come with a higher level of risk.

Whether you should invest in GICs or mutual funds — or both — depends on your investment goals as well as your risk tolerance. Keep reading for an in-depth mutual fund vs GIC comparison to help you decide where to invest.

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What is a mutual fund?

A mutual fund is a professionally managed investment fund that pools together money from investors. The fund manager then invests that money in a portfolio of assets, such as stocks, ETFs and bonds. The aim: to deliver attractive returns for investors.

Mutual funds can be actively managed to try and outperform the market, or they can be index funds that aim to replicate the performance of a specific index. Some funds target capital growth by investing in stocks, while others aim to provide a fixed rate of return or invest in specific market sectors.

The main advantage of a mutual fund is the potential upside — it’s possible to get a significantly higher rate of return from a mutual fund than a GIC. However, you’ll need to pay fund management fees, and there’s no guarantee that the fund’s investments will rise in value.

Related: Mutual funds vs ETFs

What is a GIC?

GIC stands for guaranteed investment certificate. A GIC is an investment that provides a guaranteed return on the money you deposit. How it works is simple: you deposit money with a financial institution for a set period of time, and in return you earn a fixed rate of interest.

GIC terms range from 30 days to 10 years, and in most GICs your money is “locked in” for the full term. If you want to access your funds before the term ends, you’ll pay a penalty.

The main advantage of GICs is their safety and security — you’re guaranteed to get your principal back and receive a fixed interest return when the term ends. The downside is that they don’t provide the same potential for high returns as some other investments.

Dive deeper: Guaranteed Investment Certificates (GICs)

Mutual fund vs GIC: Which offers a better return?

A mutual fund offers the potential for better returns, but those returns aren’t guaranteed.

With a traditional GIC, your principal investment is protected and you know you’ll get a fixed rate of return. Interest rates vary depending on the term length, and one-year GIC rates of around 4% – 5% were available at the time of writing. That said, there are also market-linked GICs that offer varying returns based on the performance of a stock market index.

With a mutual fund that tracks a stock market index or aims to outperform the market, your returns will vary based on how well your fund performs as a whole. If it does well, you could stand to make much more than you would with a GIC. But if the stock market crashes or your mutual fund performs poorly, you could lose money, including your principal investment.

The bottom line is that if you don’t mind a higher-risk investment with the potential for a better return, then a mutual fund could be a suitable choice. If you want to protect your principal investment and get a guaranteed return, you might be better off with a GIC. And if you want a combination of both? It could make sense to think about investing in a market-linked GIC.

Mutual fund vs GIC: Which is more flexible?

You’ll typically get more flexibility in your investment with a mutual fund because it can be cashed in or traded at any time. But mutual funds also charge management fees and you may have to pay taxes every time your fund sells shares and redistributes capital gains.

Traditional GICs charge a penalty if you access your money before the term ends. So if you want extra flexibility, you may want to consider a cashable GIC. These products allow you to take your money out at any time without a fee, but you’ll typically get a lower interest rate than a traditional GIC.

Mutual fund vs GIC: Which has lower fees?

Mutual funds are more expensive to invest in than GICs. The first thing you should check is the fund’s management expense ratio, which covers the cost of having your fund professionally managed. Sales charges (also known as loads) may also apply when you buy and sell shares in a fund, and you should check the terms and conditions for details of any other transaction fees that may be charged.

On the other side of the coin, you don’t need to pay any fees to invest in GICs. The only cost to consider is whether you’ll be charged a penalty if you want to cash in your GIC before the term ends.

Which earns you more flexibility: GICs vs. mutual funds?

You’ll typically get more flexibility in your investment with a mutual fund because it can be cashed in or traded at any time. That being said, mutual funds also charge annual fees and you may have to pay taxes every time your fund sells shares and redistributes capital gains.

GICs can also offer flexibility if they’re cashable, which means that you can take your money out at any time without a fee. Non-redeemable GICs, on the other hand, are a little bit more strict about when you can take cash out and they typically charge a penalty for early redemption.

Pros and cons of mutual funds

Pros and cons of GICs

When to consider investing in a mutual fund or GIC

A mutual fund could be a good idea if you’re targeting long-term capital gains, such as if you’re saving for retirement or to put your kids through college. You’ll need to have a reasonable risk tolerance and be willing to ride out any market fluctuations.

GICs are better suited to shorter-term financial goals, such as if you’re saving for a house deposit or a vacation. They’re a low risk investment option and provide a secure return, but just remember that many GICs won’t let you access your funds before the end of the term without paying a penalty.

Bottom line: Should I invest in a mutual fund or a GIC?

If you want a low-risk investment with a guaranteed return, a GIC could be a good choice. Mutual funds are better suited for investors who are willing to absorb more risk in return for more earning potential. Of course, this doesn’t have to be a “one or the other” situation, as GICs and mutual funds can both be included in a diversified portfolio.

Ultimately, the right type of investment for you depends on your goals and timeframe, so compare your options before deciding where to invest your money.

Frequently asked questions

• How are mutual funds different from GICs?

  Mutual funds gather contributions from many different investors and choose investments based on professional market analysis. You need to pay fees for this service and your principal investment isn't guaranteed.

  GICs are more like savings accounts that pay fixed interest rates on the money you deposit (unless you go with a market-linked product). They offer a guaranteed return on your principal investment and are typically locked in for a specific term, making it difficult to access your funds once they're invested. Provided you invest in a GIC offered by a CDIC member, they're also insured up to $100,000.

• Is it a good idea to take on more risk in my investments?

  It depends on your financial goals, your risk appetite and your investment timeframe. Many investors use a combination of investment types to balance out the risk in their portfolios, so you may want to invest in mutual funds to target capital growth and use GICs to provide stable income and protect against market fluctuations.

• How can I get the best interest rates on a GIC?

  The simplest way to find the best GIC interest rate is to shop around. Compare rates and terms from a range of providers to find the highest available rate.

• Can I apply for a GIC or mutual fund online?

  Yes, you can apply online with the provider of your choic