Description

A collection of individual bonds (such as government, corporate, and foreign) that are pooled together. Unlike individual bonds
or GICs, bond funds do not have
a set maturity date, as they are constantly bought and sold.

A type of Canadian investment, also known as a term deposit,
sold by financial institutions (the ‘issuer’). When you buy a GIC, you are loaning funds to the issuer in exchange for a guaranteed rate of interest over a fixed period of time.

Investment duration

No set maturity date, with income distribution fluctuating monthly. Units need to be sold in order to
get back the full initial investment (which will depend on their market value at the time of sale).

Unlike bond funds, interest payout on a Guaranteed Investment Certificate is held until the date of maturity, which is when you’ll receive the entirety of your investment back (plus interest).

Potential for higher returns

Bond funds have historically offered higher returns over GICs since they have no set maturity date (and more time in the market naturally equals the potential for greater returns). Plus, the inverse relationship between bond yields and prices means many bonds trade at a discount when interest rates start ticking back up, allowing you to benefit from interest payments and capital gains (as prices adjust back toward par).

Due to its low-risk profile and since the interest rate is locked in at the time of purchase (and the investing timeline is typically shorter); GICs tend to have lower returns than bond funds, stocks or mutual funds. In addition, depending on the eventual date of maturity, the rate of interest may not even be enough to keep up with inflation, which could lead to a decreased value of your investment over time.

Safety of capital

Subject to risk like most investments (i.e. when bond prices decline due to rising interest rates). Although bond funds are still considered safer than stocks.

100% safe as GICs are protected by the Canada Deposit Insurance Corporation (CDIC). No matter what, you get your full investment back plus interest¹.

Predictability of capital

Values fluctuate with changing market conditions.

Guaranteed principal and return when held to maturity.

Liquidity/early withdrawals

More liquid than GICs, as they can be bought and sold anytime.

Locked in until maturity, with penalties for early withdrawals.

Tax advantages

Outside of a registered account, capital gains from appreciation are taxed at only 50% of the marginal tax rate (income from interest payments are still taxed at the full marginal tax rate).

Outside of a registered account, GICs don’t offer any tax savings. This means that interest earned at maturity is taxed at the full marginal tax rate.

Reinvestment risk

Less risky than GICs or individual bonds since you get access to a broader portfolio which spreads risk (because you’re not dependent on the performance of just one sector). Plus fund managers are constantly evaluating and adjusting portfolios over time. As old bonds mature, they are replaced with new ones at the prevailing interest rates of the day (using a clever strategy called ‘laddering’, see more below).

While GIC investors will ultimately receive their principal along with accumulated interest upon maturity, they might struggle
to reinvest these funds at attractive rates if they suddenly find themselves in a falling interest rate environment. Hence why GICs are mostly considered to be a ‘one and done’ type of investment (although you could leverage ‘laddering’ in certain cases).