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Why GICs Are Only for Short-Term Investments—and What to Choose Instead

By: Rushit Goyani, RFRA

Guaranteed Investment Certificates (GICs) are often seen as a safe way to grow your money. They offer guaranteed returns, making them attractive to risk-averse investors. But when you consider taxes and inflation, the real return on GICs is often disappointing.

The Hidden Reality of GIC Returns

A 1-year GIC may show a 3% return on paper, but once you factor in taxes and inflation, the real value of your money remains stagnant—or worse, declines. This is because:

• Taxes eat into your interest earnings.
• Inflation reduces your purchasing power.
• Over time, your money doesn’t truly grow, but simply maintains its value at best.

If your goal is purely capital preservation for the short term (6 months to 1 year), GICs can be a viable option. However, for long-term growth, they are not the best choice.

Balanced Mutual Funds: A Better Alternative

For investors seeking a similar risk profile to GICs but with better long-term growth, balanced mutual funds are a great alternative. These funds invest in a mix of stocks and bonds, providing moderate growth while minimizing volatility.

Let’s take a look at some real balanced mutual fund performances over the last nine years:

• Low Volatility: Out of nine years of data, balanced mutual funds have had only 2 to 3 years of negative returns.
• Strong Growth: A $100 investment in 2015 would have grown to between $150 and $220 by 2024, delivering an approximate return of 50% to 120%.
• Medium to Low Risk: These funds balance safety with reasonable returns, making them a great choice for long-term investors.

 Comparing GICs and Balanced Mutual Funds

Final Thoughts

While GICs are great for preserving capital in the short term, they do not provide meaningful growth over time. If you want your money to work for you while maintaining a conservative risk profile, balanced mutual funds are a much better alternative. With historically strong returns and limited downside, they offer an excellent way to grow your wealth over time while still protecting against major market downturns.

Before making an investment decision, consider your financial goals, time horizon, and risk tolerance. But if you’re looking for growth without excessive risk, balanced mutual funds are a smarter choice than GICs.

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Segregated funds and mutual funds are very similar: they are both pooled, diversified, professionally managed investment funds. Segregated funds, however, offer some unique characteristics that mutual funds do not. These include maturity guarantees, resets, death benefits, creditor protection, and probate advantages.

What You Need to Know

1. Maturity Guarantees – Unlike mutual funds, segregated funds offer maturity guarantees, which means that the value of your investment at maturity will not be less than the specified percentage of capital that you invest. For example: If you were to invest $1000 with a maturity guarantee of 75%, at the time your contract matures, the insurance company would be obligated to ensure that at least $750 of your investment remains.
2. Resets – Segregated fund contracts offer the option to “reset” your investment, so that the gains your investment has accumulated can be accounted for when calculating the maturity guarantee amount.  Provisions for these resets vary by contract.
3. Death Benefit Guarantees – Some segregated fund contracts offer death benefit guarantees. These work similarly to maturity guarantees, except your beneficiaries are guaranteed to get at least a certain percentage of your invested capital.
4. Potential Creditor Protection – Unlike mutual funds, segregated funds are issued by insurance companies. Due to this, in some circumstances, investing in a segregated fund could offer you protection from your creditors.
5. Bypass Probate – Investing in a segregated fund gives you the ability to pass your investment directly to your beneficiaries, without the need for probate. This can save a lot of money and hassle for your beneficiaries.

The Bottom Line

Segregated funds can offer some valuable benefits that investors do not have access to by investing in mutual funds. It is important to note that segregated funds traditionally have higher fees than mutual funds. As always, it is important to work with your team of financial planning professionals to determine what investments are best suited for you.

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