Is it worth putting money into GIC or Mutual Fund?

Tons of investment avenues have opened for those willing to put their money to work for better returns these days. But the mere existence of investment options in 2023 is a dime a dozen. 

So much so, that picking the right one over the others is rather daunting. If you are prepared to invest a portion of your full-time job earnings aside to be able to enjoy greater returns, you want an investment prospect that is low-risk and offers you peace of mind. 

Out of all the options available for pooling your money, GICs and mutual funds are quite commonly talked about. Well, if you are clueless and confused as to which one to go for, I got you covered. Sit back, relax, and keep scrolling to feed your curiosity against all possible confusion.

What is a GIC?

GIC, which expands as a Guaranteed Investment Certificate, is a great short-term investment option for those who are ready to set aside their money for a longer period. The concept of a GIC is quite similar to that of a savings account, where investing money for a longer period helps you earn interest.

The edge you have with a GIC is that it gives greater interest rates than a savings account (about 1% to 3%) if you keep your funds undisturbed for the long run. The longer the period, the higher returns you enjoy.

However, GICs might not a viable option for everyone. If you need funds frequently or can’t afford to have your investments locked up for a long time, this option might not work well for you.

You must be first prepared for the fact that you won’t be able to access your money for at least a month. Once this is done, you have nothing to lose as your money will come back to you with some returns.

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How do GICs work?

The period for GICs ranges from 30 days to 10 years. During this period, you can’t withdraw or cash out. If you do, it will mostly cost you a penalty. It is locked into your GIC.

The biggest advantage with GICs is that your money is never at stake as it is low risk, thus the term ‘guaranteed’. At the end of your term, you will certainly get the principal balance with the summed-up interest. 

You can buy GICs from big banks, credit unions, investment firms, or trust companies. Before investing, if you are skeptical about leaving your hard-earned money for the entire period, you have the option to choose a cashable or redeemable GIC.

Unlike regular GICs, you can cash out from redeemable GICs without having to pay a penalty or facing similar consequences. 

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Pros of investing in GICs

According to me, these are the perks of buying GICs:

• They guarantee you your principal amount with the interest.
• The interest rates are higher than savings accounts.
• The investment requirement is minimal.
• There are no additional fees involved.
• They are a great way to preserve your savings.
• You don’t require much financial knowledge to invest as GICs have a simple way of functioning.
• They are RRSP and TFSA eligible.

Cons of investing in GICs

The drawbacks of GICs are:

• Penalties are applicable on withdrawing money before the end of the period.
• GIC is an illiquid option for the entire period.
• They don’t give as many returns as market investments. 

What is a mutual fund?

You can think of a mutual fund as a basket of many different stocks, bonds, and ETFs. It is typically viable for those who wish to maintain a diversified portfolio. You can expect as many as 100 securities in one mutual fund.

It pools money from many investors into a single fund. This fund is a mix of different kinds of instruments. All of them are jointly managed and maintained by a financial advisor. 

However, unlike a GIC, a mutual fund does not guarantee you a return on the investment. This is why it involves slightly more risk than the former. 

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How do mutual funds work?

Mutual funds have a similar way of functioning as exchange-traded funds. You can invest in mutual funds directly from your bank. Slight research is needed before you go on to invest in such a fund as it has a plethora of different instruments. So, financial knowledge is required to an extent before you invest your money. 

When you invest in a mutual fund, you buy the shares or better known as units, in the mutual fund. Gradually, you can thus enjoy the benefits of those shares as and when the market goes on a rise. 

However, you must be bold enough to not be tempted to withdraw your investment when you see your holdings go down during a bearish run. One flexibility is that you have the freedom to invest any amount of money in a mutual fund at a given time.

It is because you can easily buy partial units. Investing in tons of different instruments gives you broader coverage and ultimately reduces the risk.

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Pros of investing in mutual funds

The advantages of investing in mutual funds would be:

• No minimum investment is required.
• Mutual funds are a highly liquid form of investment. 
• The individual will get broad exposure to different kinds of securities and instruments in a single fund.
• A diverse portfolio will lead to the minimization of the investment risk.
• Mutual funds ensure a higher return rate than GICs or regular savings bank accounts.
• You can easily buy partial units with a minimal amount of investment at any given time.

Cons of investing in mutual funds

The disadvantages of investing in mutual funds are as follows:

• Mutual funds are a highly risky form of investment.
• The returns are not guaranteed. They depend on how the market is doing. There is immense market risk.
• Investing in mutual funds involves a considerable amount of fees. The MER or the Miscellaneous Expense Report rate is about 1% to 3% or even more.

Pros of Investing in Mutual Funds	Cons of Investing in Mutual Funds
1. No Minimum Investment: Mutual funds often have no minimum investment requirement, making them accessible to a wide range of investors.	1. High Market Risk: Mutual funds are subject to market fluctuations, and there’s no guarantee of returns. Market volatility can lead to potential losses.
2. High Liquidity: Mutual funds offer high liquidity, allowing investors to buy or sell their shares on any business day.	2. Fees and Expenses: Investing in mutual funds involves fees like Management Expense Ratio (MER), which can eat into your returns over time.
3. Diversification: Mutual funds provide instant diversification by investing in a mix of different securities, reducing the impact of a poor-performing investment.	3. No Guaranteed Returns: Unlike some other investments, mutual funds do not offer guaranteed returns. Your returns depend on the performance of the fund’s underlying investments.
4. Professional Management: Experienced fund managers make investment decisions, saving investors time and effort in research and portfolio management.	4. Lack of Control: Investors have limited control over the individual securities within the fund’s portfolio.
5. Higher Returns Potential: Mutual funds can offer higher potential returns compared to traditional savings accounts or low-risk investments.	5. Tax Implications: Gains made within mutual funds may be subject to taxes, affecting overall returns.
6. Fractional Investing: Investors can buy partial units of mutual fund shares, making it easier to invest small amounts and gradually build a portfolio.	6. Market Fluctuations: Mutual fund returns are influenced by market conditions, which can be unpredictable and lead to varying returns.
7. Simplified Investing: Mutual funds are suitable for those with limited investment knowledge, as professional managers handle the fund’s strategy and decisions.	7. Sales Charges: Some mutual funds charge sales loads or commissions when buying or selling shares, impacting your initial investment.
8. Retirement Planning: Mutual funds offer retirement-focused options, such as target-date funds, helping investors plan for their retirement years.	8. Lack of Transparency: Not all mutual funds provide full transparency about their holdings or strategies, which can make it challenging to assess their risk and potential.

How are the two similar?

Although the two are quite distinctive and distinguishable from one another, GICs and mutual funds have a handful of similarities. You can buy GICs and mutual funds and hold both of them in registered or non-registered accounts, according to your preference. 

To be more specific, you may buy a market-linked Guaranteed Investment Certificate wherein the interest you will earn depends on how the stock market does. This way, the market situation decides your profits or losses. 

On the contrary, you can also go for a money market fund. Here the advantage is that the risk is minimal as it deals with short-term investments which are not as unstable as the typical mutual funds that go according to the market.

How are they different from each other?

The risk associated with GICs is very minimal. But no risk means no gain, which implies that the returns are not as very high. GICs have low-interest rates, but they do ensure guaranteed returns.

On the other hand, mutual funds come with greater risk and greater returns. There is more volatility but the returns are high.

Regarding liquidity, mutual funds are better since you can liquidate your funds, unlike GICs that block your money. Also, GICs involve little additional expenses. The only drawback is the penalty you need to pay if by any chance you plan to withdraw your money before your term ends.

Talking about mutual funds, they involve a heavy amount of additional fees. For example, the average management fee for the majority of mutual funds comes to about 2%. 

Which Is Better – GICs Or mutual funds?

The first criteria that you should keep in your mind while choosing between investing in GICs and mutual funds should be the approach with which you invest. This mostly implies the amount of risk you are ready to take with your investment. 

Also, it depends on what you expect from your investment, that is, your financial goals (which require a good financial habits). You must be aware of how long you can afford to keep your money aside for the investment. If you are in constant need of funds, it is not viable to go for a long-term GIC that will block your money. 

Now, if you are a risk-taker, mutual funds can also go a long way. However, you must have a positive attitude even when the market falls. 

One crucial thing to note is that it is not necessary to choose any one of the two. some also prefer to go for both, since they want a diverse investment portfolio. This way, some of your funds can get locked into a GIC and some can be invested into a mutual fund. 

Final Words

It is upon you and the kind of expectations you have from your investment to decide what’s best for you. As discussed, both have their pros and cons and different ways of working.

With thorough research and an understanding of your monetary goals, you would be able to make an easy decision.