If you anticipate needing access to your funds before the maturity date, redeemable GICs provide flexibility. However, some financial institutions may impose penalties for early redemptions, and their interest rates tend to be lower than non-redeemable GICs.
These GICs typically have terms of less than one year, with some as short as 30 days. They are suitable for investors who might require their funds in the near future. Short-term GICs can be redeemable or non-redeemable, with shorter redemption times generally associated with lower interest rates.
Designed for periods exceeding one year, long-term GICs offer some of the highest interest rates available in Canada. However, non-redeemable long-term GICs lock in your funds, preventing early redemption if interest rates rise due to factors like inflation.
These GICs are linked to the equities market, potentially offering higher returns than traditional GICs. The interest rate for market-linked GICs is tied to the performance of an underlying stock index, meaning your returns can vary based on market performance.
Bonds are another form of fixed-income asset issued by governments or corporations to raise capital. Like GICs, bonds involve lending money and receiving interest payments, with the principal amount returned at the end of the term. However, bonds offer some distinctions:
These are considered among the safest investments in Canada because they are 100% backed by the Canadian government. Government bonds come in various term lengths, with interest rates determined by the bond yields issued by the Bank of Canada. There are also Provincial and Municipal government bonds available.
Corporations issue these bonds to raise capital for their operations. They carry more risk compared to government bonds, as companies can go bankrupt and default. In exchange for this increased risk, corporate bonds typically offer higher interest rates.
Also known as high-yield bonds, these come with a higher risk of losses despite their more attractive yields. Junk bonds have lower credit ratings than government or corporate bonds, hence the “junk” label.
While less common among retail investors, convertible bonds are available in Canada. These bonds are issued by corporations and can be converted into common shares of the company’s stock at the end of the bond term.
Investors can purchase bonds from other countries, often opting for bonds issued by economically stable countries like the United States. These bonds provide returns in foreign currency.
For those who find it challenging to select individual bonds, bond exchange-traded funds (ETFs) offer diversified exposure to a basket of bonds. Bond ETFs do not return the face value investment upon maturity; instead, the fund manager continuously purchases new bonds, providing investors with regular monthly distributions.
Bonds offer more flexibility for early redemption compared to GICs. However, selling bonds before maturity can result in a loss of some of the face value of your initial investment.
Both GICs and bonds provide returns in the form of interest or bond yields. Bond yields are influenced by treasury yields issued by the Bank of Canada, while GIC rates are determined by the prime rate from the Bank of Canada.
When you invest in either a GIC or a bond, you essentially hold an IOU from the issuer. Both instruments have predetermined maturity dates, at which point you receive your initial investment’s face value along with any interest earned.
GICs and bonds are considered very safe investments, with a minimal risk of losing money. However, their returns are typically lower compared to investments in stocks.
GICs and bonds serve different roles in an investment portfolio. Bonds can be a sustainable, long-term investment strategy favored by many Canadian retirees seeking steady income. GICs, on the other hand, are often viewed as short-term or temporary investments.
The better choice between the two depends on your specific circumstances. If you seek zero risk and anticipate needing access to your funds in the near future, GICs may be preferable. On the other hand, if you desire a consistent, long-term income stream without the volatility of the stock market, bonds could be a better fit.
Most major Canadian banks and financial institutions offer GICs and bonds for investment. To save on commissions, consider Canadian discount brokerages that offer fixed-income assets. For example, Questrade provides zero-commission trading for bonds and GICs. However, some brokerages may have minimum investment requirements for these assets.
While GICs and bonds are fixed-income assets, mutual funds differ in that they represent a diversified portfolio of assets managed by professionals. Mutual funds can include a mix of stocks and bonds, and investors pay a Management Expense Ratio (MER) for the fund’s management.
Mutual funds do not trade on stock exchanges like ETFs, and they cannot be traded during regular market hours. Canadian investors can hold mutual funds in both registered and non-registered accounts.
By understanding the differences and similarities between GICs and bonds, you can make informed decisions about how these fixed-income investments fit into your overall financial strategy. Consider your investment goals, risk tolerance, and time horizon when choosing between these options to build a well-rounded investment portfolio that aligns with your financial objectives.
