Differences between GICs and mutual funds explained

What are the key differences between GICs vs. mutual funds?

GICs and mutual funds are both easy and accessible ways to start investing with low minimum requirements. Here’s a breakdown of the costs and benefits that each investment product provides.

Risk and Return

New investors should know that as a general rule, the higher an investment’s potential return, the greater the risk.  Many mutual funds hold stocks and are affected by equity market performance, allowing those funds to offer  higheroffer higher potential return than what’s typically available from GICs. However, they can also lose money. Because GICs usually have a fixed interest rate that’s not tied to the stock market, they provide a low butpotentially lower returns, but they are a guaranteed return on investment (a key exception is market-linked GICs, whose potential returns are described above).

Lock-in Period

Mutual funds offered by BMO don’t have any lock-in period, so you can withdraw your money anytime you need it, although mutual funds tend to work best as a long-term investment. Cashable GICs allow you to access your funds at any time. Non-cashable GICs are fixed-term investments that have a lock-in period that can usually range from a month 30 days to up to 10 years, depending on the GIC you buy. This makes GICs less flexible and better suited for investors looking for low-risk investment product with no surprises.

Withdrawals

Cashable GICs allow you to access your funds at any time. Non-cashable Most GICs don’t allow you to withdraw your money before maturity without penalty. Mutual funds provide greater flexibility than GICs because you can withdraw and receive your money in as little as one business day without penalty.

Fees

A key feature of mutual funds is the management expense ratio (MER), which covers the cost for the investment company to manage the mutual fund, including things like portfolio management, customer service and administration.  The MER isn’t something you pay directly, but is instead factored into the value of your mutual fund units every day.  MERs often vary based on the holdings within the mutual fund and the investment strategy.  For example, small-cap equity mutual funds will have a higher MER than a fund holding investment-grade corporate bonds. In comparison, GICs have no MER, but you may pay a penalty if you cash in your GIC before its maturity date if you invest in a non-cashable GIC.

Taxes

The tax implication for mutual funds and GICs is first determined by whether the funds are held-in a non-registered account or a tax-sheltered account. In a non-registered planaccount, GICs are generally taxed more heavily than mutual funds because 100% of their returns are interest income.  In a mutual fund, on the other hand, growth is more often taxed at a lower rate as capital gains or dividend income. In either case, the tax implications of a withdrawal are related to one’s marginal tax rate when the investments are taken out. Other transactions, like mutual funds distributions of interest, dividends or capital gains are also subject to tax treatment. A good policy is to consult a personal tax advisor to understand the tax impact of your investment portfolio. 

In a tax-free account (like a TFSA, or FHSA) or a tax-deferred account (like an RRSP), the gains accrued by both mutual funds and GICs enjoy the tax advantages that the account type offers.

Let BMO help you choose the right investment

It’s key that investors understand that a GIC and mutual fund aren’t mutually exclusive. Both can provide you the opportunity to achieve different investment goals. BMO offers wide array of mutual funds and secure GICs that can be suited to match all different types of your financial goals.