Skip to main content

Striking the Right Balance: Why Investors Shouldn’t Pit GICs vs Mutual Funds

By the Inspired Investor Team

Published June 7, 2024 • 6 Min Read

If there’s one rule of investing most people should follow, it’s to stay diversified. A portfolio that combines both stocks and bonds, for example, can better weather different market conditions because these assets tend to rise and fall at different times. Investors can also strike a balance by holding some of their money in both cash-like and market-based investments.

This is where Guaranteed Investment Certificates (GICs) and mutual funds come in. These two popular investment products can complement each other in a diversified portfolio, and instead of trying to choose whether to invest in GIC or mutual funds, there may be a reason to include both. GICs typically offer lower risk and steady income, whereas mutual funds potentially have more risk with the chance for enhanced long-term returns.

We’ve provided a breakdown of the key benefits of GICs and mutual funds to help you begin to navigate your decision.

What is a GIC?

GIC is a low-risk investment that guarantees 100 per cent principal protection, when the investment is held to maturity. You can choose to invest your money for a certain period of time – i.e. a few days or several years, in exchange for a certain rate of interest. GICs can be a good option at any stage of life, depending on your needs. They are often used in retirement as well as for short- and medium-term goals, such as a purchasing a home or a car, where you can’t afford short-term volatility impacting your investments. Typically, they are best suited for investors who have a time horizon of between three to five years or have a low risk tolerance.

Understanding GICs

GICValue
BenefitsSafety: There is no risk to your principal and you can potentially earn more interest in a GIC than in a traditional savings account.
FeesNone
Minimum investmentAs little as $500
Risk levelDependent on GIC selected
CIDC eligible?Yes, GICs are covered for up to $100,000 if issued by a CDIC member institution, subject to account limitations.
Holding periodsGIC terms can range from several days to several years
Liquidity – how accessible is your money?Discourages early withdrawals – Some GICs may forfeit any interest earned or charge a penalty if you sell before the end of the investment term. If you need more flexibility, consider a redeemable GIC. While you may get a lower interest rate you can take your money out at any time
TaxationInterest Income – Interest earned on GICs is considered taxable income if held outside a registered account.

What is a Mutual Fund?

mutual fund is an investment vehicle that is managed by a professional fund manager who does all the analysis, security selection, and risk management for the mutual fund. Mutual Funds may hold stocks, bonds or a variety of other investments consistent with the mandate of the mutual fund. People tend to put longer-term savings in mutual funds, such as money for a home, a child’s university education and retirement.

Understanding Mutual Funds

Before beginning your investment journey, it is important to understand that your financial decision should align with your investment objectives and financial goals. A conversation with your advisor can help determine the right fit for you.

Mutual FundsValue
BenefitsDiversification:  Your Advisor can make investment recommendations that span across a range of securities, sectors, geographies and asset classes. There are also targeted funds that invest in specific regions or industries. Recommendations for specific Mutual Funds will depend on the client’s objectives and financial plan.
 
Mutual Funds also offer the opportunity for regular investing through PACs (Preauthorized Contributions) which allow for “dollar-cost averaging” that can potentially support higher long-term returns.  
FeesFees are dependent on mutual fund selected. (See Fund Facts and Prospectusfor the applicable Mutual Fund before purchasing.)
Minimum investmentDependent on the Mutual Fund selected, but could be as little as $25 
Risk levelDependent on the Mutual Fund selected
CIDC eligible?No
Holding periodsNone
Liquidity – how accessible is your money?Mutual Funds are redeemable at any time, subject to trade settlement requirements. 
TaxationTaxable outside of registered accounts, with the potential for preferred tax treatment if capital gains or dividend income is generated.  (To ensure that your own circumstances have been properly considered and that action is taken based on the latest information available, you should obtain professional advice from a qualified tax advisor.)


Investors contemplating “GICs vs. Mutual Funds,” may in fact benefit from the right mix of both investment options to achieve their goals. 

Book an appointment today through MyAdvisor or RBC Online Banking to arrange a personalized conversation with a advisor who can help you clarify and define the right approach for you.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

Mutual Funds are sold by Royal Mutual Funds Inc. (RMFI). There may be commissions, trailing commissions, management fees and expenses associated with mutual fund investments. Please read the Fund Facts/prospectus before investing. Mutual fund securities are not insured by the Canada Deposit Insurance Corporation. For funds other than money market funds, unit values change frequently. For money market funds, there can be no assurances that a fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in a fund will be returned to you. Past performance may not be repeated. RMFI is licensed as a financial services firm in the province of Quebec.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

Share This Article

Topics:

GIC Investing Mutual Funds