Guaranteed Investment Certificates vs. Mutual Funds: Which is Better? (Writing Sample)

Retirement planning can be daunting. Beyond math, there are factors that need consideration with each type of investment; one of those considerations: mutual funds versus guaranteed investment certificates (GIC).

Each persons' retirement requirements and preferences are different; so this guide is not intended to provide financial advice, but to help you be more prepared when considering investment options.

Lets demystify the confusing verbiage of investments.

Mutual Funds: The Basics

A mutual fund pools resources from many clients, investing the bundle of monies into stocks and bonds; it's up to the fund's manager to decide the best risk/reward spread.

Diversity in our investments is important, as the diversity of investments within the mutual fund itself.

A few details to help define mutual funds:

• You can withdraw your funds at any time (processed at end of that day).
• Performance of the fund manager has an impact!
• Allows for investments into funds difficult to reach on your own.
• Mutual Funds are also sometimes referred to as: equity securities.
• Unlike stocks, there are no voting rights.
• Most mutual funds allow for monthly, ongoing investments.
• Typically, you can reinvest your proceeds; or withdraw them.

Critical attributes of Mutual Funds to consider when investing:

• Risks and Returns of mutual funds are variable.
• Too much — or too little — diversity within the fund, could increase risk.
• Foreign investments within the fund could introduce more risk.
• Fund management fees, are assessed as a percentage of your assets in the fund.
• Fund management fees vary from fund to fund.
• Fund managers must give you a copy of the fund's performance data and legal disclosures.

A note about taxes and capital gains: the sale of securities from your fund will expose you to taxes on capital gains.

To help reduce your tax exposure: consult with your financial adviser/planner about investing in tax sensitive funds, investing in a 401(K), and/or individual retirement account (IRA). Tax exposure must be evaluated on a case by case basis.

Non-traditional, newly regulated mutual funds: “Alternate Mutual Funds”

The alternate mutual fund managers invest into non-traditional assets like Hedge Funds. They could also invest into: derivatives, short-sell securities, physical commodities, and/or borrow cash for investments.

Caution: alternate mutual funds tend to be more volatile, with a potentially higher return; at greater risk.

We've covered the most critical basics to mutual funds, and how they work; lets move on to Guaranteed Investment Certificates (GIC).

To GIC, or Not to GIC? What You Need to Know:

It’s nice having a guaranteed return on your investment; but there is a downside: the returns are smaller. We’ll dig a little into the benefits of having a GIC.

With a full-range of term options, you can find a GIC term from 30 days to 10 years (1-5 yrs is typical). The longer the term, the better the rate of return on your investment.

With a GIC, you're insured up to C$100,000 (as of this writing); this assumes your GIC term is no longer than 5 years.

Over a 5 year term? The Canada Deposit Insurance Corporation (CDIC), or other provincial insurers; will rarely insure them.

Regardless of term; we’re looking for the highest percentage rate we can get, to maximize the return of your investment. No matter what your term is; banks use annualized rates, and are not calculated for the entire term.

There are two major categories of GICs:

Registered and Non-Registered. Either way, you may have pay a fee to open the account; but no management fees.

Non-Registered GICs are the most common, and have fewer restrictions than registered GICs; it is easy to compare non-registered GICs side by side.

Registered GICs have more restrictions, limits, and other considerations; but the rates are sometimes more favorable compared to non-registered GICs.

There are two types of Registered GICs that could help reduce tax exposure:

• Registered Retirement Savings Plan (RRSP), or a
• Tax-Free Savings Account (TFSA).

Let's take a quick gander at the differences between a RRSP, and a TFSA.

Registered Retirement Savings Plan (RRSP):

• Contributions are tax deductible (up to 18%), and your taxes are deferred until withdrawn on any investment growth.
• Usually has age restrictions.

Tax-Free Savings Account (TFSA):

• Save money for anything with no taxes on growth.
• Contributions are not tax-deductible (from income); and Capital Gains are not taxed, even when withdrawn.
• Save up to C$6,000 per year in your TFSA (if you're over 18 years old).

Hold up! I know what you’re thinking: do you need a TFSA, or RRSP?

This depends on your age, income, tax exposure, and if you want to contribute weekly/monthly.

Here’s the kicker: don’t even worry about it! You’ll discuss this with your retirement planner or adviser.

Here’s what the insiders will tell you:

Minimize your tax exposure?

You’ll likely want to mix your GIC investments with either:

• A TFSA and a Non-Registered GIC, or a?
• RRSP and a Non-Registered GIC.

There’s no sense trying to out-run the tax-collector! That’s what your retirement planner or investment adviser is for: creating a maze!

Don’t worry about the in’s and out’s! A professional adviser knows what to do, they’ll mix them up based on your personal situation.

Registered and non-registered GICs typically have penalties for withdrawing your funds early (when they haven't matured yet).

Is there a chance you may want to withdraw funds out of your GIC before it matures? Ask your adviser about: ‘cash-able’ or ‘redeemable’ GICs!

These may not be an option on some GICs, restrictions and options vary from bank to bank.

Rolling it over?

Your investment agent or retirement planner may suggest ‘rolling’ or ‘laddering’ your GICs.

Some banks or credit unions may roll your GIC into a new GIC after it matures automatically, others may not. Check with them to see if they do!

Laddering or rolling your GIC keeps you on a 5 year term; this is important, that’s how you keep your investment insured.

Unsecured investment? Oh no you don't!

Boiling it Down: Protein or Potatoes?

So, where are we sitting at? Mutual funds, or GICs?

Think about it like this: do you only want potatoes? Or only protein? No! One or the other? That doesn’t even make sense!

Here’s why: No matter your investment amount, it’s always good to explore your options; to see what you need, and what reduces your tax exposure. There's no 'one size fits all' in investments.

Tax-collectors love a good challenge! Reducing your tax exposure makes them work for it.

Every situation is a little different. That’s why you’ll ask yourself (or your adviser will):

• Are you contributing monthly? If so, how much?
• How old are you? What age do you plan to retire?

• What will your tax exposure be? 5 years from now?
• What’s your risk of tax exposure when you reach retirement age?

• Will you need to withdraw some funds out early?
• Will your portfolio be diverse enough to mitigate the risks?

• Plan on contributing your tax refunds into your investment plan?
• You have, or will have a mutual fund. Do you still need to diversify?

You may not think those questions are important now; but in 5 to 10 years, they will be!

Regardless of your investment amount, even if you don’t need a retirement planner right now; at least talk to your investment adviser at your job, at your bank, or at your credit union.

Even when you’re starting out with C$5,000, knowing what works best for you keeps your mind secure; and your money secure!

Dumping everything into one pan?

In the end, you may end up with no dinner; and still have a big mess to clean up!

It’s always good to make sure you’re working with a reputable company.

It’s suggested — after checking reviews and other research into your options — that you check a company’s regulatory status with the Ontario Securities Commission, and with the Canadian Securities Administrators.

Due diligence and researching the background of companies you want to do business with is always important; but even more critical when you are outside of Canada, and making a purchase to help attend college in Canada.

Some investments allow for people outside of Canada, to invest and save for their education; when they're planning on attending a college or university in Canada.

Knowing who you're investing in, can protect that investment!

Writing Sample (no third party editing).

I gladly welcome any comments, suggestions, and/or constructive criticisms. Thank you!

?2019 Kevin Leo Smith. All rights reserved.