Investment Vehicles in Canada

There are many different investment vehicles available to Canadians. Choices should be based upon an individual’s situation, risk tolerance, timeline, objectives, alternatives and investment knowledge. Each investor is as unique as their goals and circumstances, most people utilize a combination of the following types of investments: GIC’s GIC’s, or Guaranteed Investment Certificates, are essentially a loan you make to an investment company. In return for your loan, they promise to pay you a predetermined amount of interest, for a predetermined amount of time. This interest may be paid monthly, quarterly, biannually, annually or at the conclusion of the term. Typically, the longer the term, the higher the interest rate will be. At the end of the GIC term, your capital and any remaining interest earned will be paid back to you. GIC’s are generally considered a low-risk type of investment. Deposits into GICs are protected by the Canadian Deposit Insurance Corporation (CDIC) against default. Your investment will be repaid if the institution fails or is unable to repay the balance. Since GICs require a commitment to a certain term (1 year, 5 years, 10 years etc.), they are not considered to a be a liquid investment and therefore are best suited for funds needed after the term expires. Bonds Bonds are a debt instrument. This means, that investors lend either a corporation or a government money and the borrowing organization pays the lending investor interest in regular intervals. This type of vehicle is often referred to as fixed income investment. Like GICs, bonds require a certain amount of investor commitment. Every bond has a maturity date, however many secondary markets exist where bonds can be bought and sold prior to maturity. All other factors being equal the price and corresponding yield is influenced by the prevailing bond rates, not rates when the bond was originally issued. Unlike GICs, bonds are not guaranteed investments. While they are generally considered to be lower risk, there is a chance the borrower could default on the loan and the investor could lose their capital. To allow investors to manage this default risk, each bond is given a rating. Think of the risk rating as the borrower’s credit score. If a bond has a high rating, lower interest or yield is earned since the likelihood of losing capital is, also, lower. Equities A share or a stock is a security that represents ownership in a publicly traded company. Being an owner allows an investor to participate in the overall growth of a company. The share prices adjust continuously as they are traded on a stock exchange like the Toronto Stock Exchange (TSX) or New York Stock Exchange (NYSE). Over time the price could increase (or fall) and dividends, which are funded by company profits, can be paid. This is what many people first think of when they think of investing. Typically, companies issue stock through an Initial Public Offering (IPO) or a issue new shares to raise capital to fund the growth of the business. Investors seek to purchase at a low price, then sell the share when the price has increased to realize a capital gain. Mutual Funds

A Mutual Fund pools investor funds and invests in stocks, bonds, and other types of securities. Each investor buys shares of the fund and participates in the growth/loss of the mutual fund’s portfolio. Each mutual fund has an investment objective and strategy called a mandate. Mutual funds allow investors to diversify their investments within the mandate of the fund and utilize the expertise of the professional fund managers. Mutual Funds are usually actively managed and allows a more hands-off approach for individual investors. For example, some mutual funds focus the investment in a specific sector like banking or energy. Other funds invest in different parts of the globe such as the Americas or Asia. Since mutual funds contain the shares of many different companies tend to be a lower risk option than owning shares in only one company. ETFS Exchange Traded Funds (ETFs) are a type of pooled investment that is much like a mutual fund, but with key differences. Like a mutual fund, an ETF is comprised of pooled investor funds that invest in a certain assets class, sector, or stock exchange based on its mandate. ETFs can be actively managed but were originally designed to be passively managed by tracking an index like the S&P 500. This means there are no changes being made to the underlying holdings by the fund’s managers. ETFs are purchased on a stock exchange the same way individual stocks are. ETFs are still a relatively new investment vehicle but are popular due to their management expense ratio (MER), which is typically lower than a mutual funds MER. Segregated Funds Segregated Funds (Seg Funds) are individual insurance contracts that are a type of pooled investment. They are very similar to mutual funds but are unique in that they provide a death and/or maturity guarantee that protects a portion of the invested capital (usually between 75% and 100%). Typically, the investment must be held for a certain length of time to activate the guarantee. Due to the guaranteed nature off Seg Funds, they tend to have slightly higher fees than a traditional mutual fund. Seg funds can be an important estate planning tool, as they are one of the only types of non-registered investment that allows a direct beneficiary designation.