Mutual Funds, Guaranteed Investment Certificate Or Savings Account?
If you are lucky enough to have a bit of disposable income, you are doing the right thing by researching ways of saving or investing your money. By reading about the different options available to you, you’ll be able to make an informed decision and make the best possible choice for you and your money. How you decide to save and/or invest your money will depend on many variables. Some of these include how much money you’ve got to work with, how much time you’ve got to work with and your all-important tolerance to risk. After reading the brief overview of mutual funds, Guaranteed Investment Certificates (GIC) and savings accounts below, it is advisable to discuss all your options with a personal finance advisor who can assess your situation on an individual basis.
Mutual Funds
A mutual fund is an investment where the money invested by many investors is pooled and then invested in a wide range of investments. The investments typically included in mutual funds include stocks, bonds, securities, short-term money instruments and others. Mutual funds are generally considered to be pretty safe as they are highly diversified. Each mutual fund will have a manger that is charged with trading the fund’s assets regularly. This person’s job is to maximize the rate of return for all the investor’s whose money is invested in the fund. The benefit of investing your money in mutual funds is that you can start with as little as $25 dollars and contribute to your fund on a regular basis. This is a great way to get started in investments and to grow your money even when you do not have access to a lump sum.
Guaranteed Investment Certificates (GIC)
A Guaranteed Investment Certificate, or GIC is a type of Canadian investment in which the rate of return is guaranteed over a fixed period of time. Guaranteed Investment Certificates are relatively low-risk investments, and thus yield smaller returns than that of stocks, bonds and mutual funds. Within the category of GIC’s, there are lower-risk options and higher-risk options; however, GIC’s in general are considered low risk because even if you earn less interest or jeapordize your access to interest earned by withdrawing early your initial investment is guaranteed. These safe and secure Canadian investments earn interest at a fixed rate, variable rate, or based on a market-based index.
Savings Accounts
Savings accounts are very safe and flexible places in which to basically store your money. You can open a savings account at any bank and with as little as $25. You will have access to your money at all times, and depending on how much you keep in your savings account at any given time, may not even have to pay any bank fees. The downside of keeping money in a savings account is that your cash will earn little to no interest. Interest-bearing savings accounts earn very little interest compared to Guaranteed Investment Certificates or mutual funds. However, if you feel that you will (or may) need access to your cash during the short term, this is a great and safe place in which to keep your savings. Many people start saving with this type of account then transfer lump sums to other investments such as GIC’s or mutual funds.
The Verdict
Now that you know a bit more about GIC’s, mutual funds and savings accounts, you are better prepared to talk to your financial advisor about what’s best for you. If you don’t currently work with a financial advisor, speak with a customer service representative at your bank.
Whether you are looking for a mortgage refinance, fixed, variable, open or closed Mortgage loan, our financial Coaches can help you figure out which one is just right for you. Ontario Credit Union offers the most convenient GIC rates on the market.
Mutual Funds FAQ:
Question: If need to take $50K from my mutual funds (in Canada), how much tax do I need to keep to cover it at tax time?
Does anyone know how much cash I need to put aside to pay the tax on $50,000.00? I want to take it from my mutual funds which have been untouched in decades. I need only 50,000. How much should I take out to have 50 free and clear?
Answer: You need to calculate your capital gain, which will determine your tax. This all depends on your Adjusted Cost Basis (ACB) which is what you paid for the portion of the funds you are selling.
Say the Adjusted Cost Basis on the total funds is $100K. Say they are now worth $150K. If you sold 60K, your realised gain is 60K – (60/150*100K) = 20K. You figure cap gain on $20K = 1/2 of 20K x your marginal tax bracket, which is probably around 45%, depending on your province. In this case, the tax is about $4500, leaving you $55500.
Question: Investing in Mutual Funds in Today’s economy?
I was just wondering if it is smart to invest into mutual funds considering the current recession, etc. I’m in Canada, so, I don’t know if that impacts anything or not. I just wanted to start saving money and allowing it to grow.
Answer: Mutual funds are a long term investment. Today’s economy or next year’s economy makes no difference. Your time horizon is what matters. If you have at least ten years to invest then mutual funds are generally a good idea. When the market is collapsing, that’s when you get stocks dirt cheap and you can make a good profit when the markets recover.
Question: How do I report a mutual fund that was rolled over to buy more mutual funds?
I started out with two mutual funds. When I transferred them to a new investment company those two funds were used to buy three new mutual funds. This year I sold all three funds. I’m using turbo tax and I understand how to report the three I sold but I really lost on how to report the first two I had and never actually got any cash for. There were no gains or losses on them so I’m not sure how to enter the information.
Answer: You don’t need to “get cash” to have a capital gain or loss. From your description, it appears that you sold the first two funds to get money to buy the last three funds. When you sold the first two funds, the amount you received for them determines whether you had a gain or a loss on each, which you have to report on your tax return. Then, your initial investment (or “basis”) the in the last three funds is the amount you paid to buy them, not the amount you paid to buy the first two funds which you later sold.
Summary: Report all 5 transactions as if you sold the first two funds for cash, and then bought the last three funds also for cash.
Question: How many mutual funds are there in Canada?
Not fund companies but funds.
Answer: There are over 250 fund families available in Canada. Thus there are thousands of funds available for investing.
Question: My parents up in Canada want to invest in mutual funds using ING Direct. What are some of the hidden fees?
I know that the US has them, however, I also know that the US and Canada ING Directs are different. Can you tell me, what you think of them from personal experience?
Answer: Its irrelevant. Products are products. They all have fees and they are all about the same. What you have to know is it works differently in Canada. The dealer/advisor compensation is built into the fund costs or “hidden” as you term it. So in Canada everyone generally pays a “set” cost of say 2.50%. (for accounts under $500,000) whereas in the US you pay a much lower set fee and then negotiate for the balance. The end cost could still very well be 2.5% in the US but its more transparent. Advise them to hire a qualified financial planner who they know they can trust and knows his stuff.
Question: I am looking for a program that will keep track of mutual funds on a daily basis?
I will be entering the initial cost per unit and the total number of units purchased plus the date of purchase. I would like to see the value in comparison (+or-) to the initial investment on a daily basis.These will be mutual funds purchased in Canada but not all being in Canadian funds.
Answer: The Microsoft excel add-in program may work for you. With a simple spread sheet, add the codes for your mutual funds and anytime you hit “update” you will get the current quote, with the data calculated in your spread sheet.
Question: Do US mutual funds, stocks and Bonds are taxed higher than Canadian investments if you live in Canada?
Answer: You may be subject to withholding taxes on any capital gains, or interest you earn on your US-based investments. You might need to file a 1040NR with the IRS to claim a credit for these on your Canadian taxes.
Canada will tax your Capital gains and interest in the same fashion as on Canadian investments.
The exception is dividends paid from eligable Canadian corporations. There is a tax break on these that makes dividends from Canadian corporations preferable to those from foreign companies.
Question: When looking at diversification of a mutual fund portfolio, how many mutual funds should I be buying into?
Answer: For diversification, putting it into five or so funds that invest in different types of stocks is best. You shouldn’t put it all into an S&P500 fund, because that fund only represents 500 of the biggest companies in the United States — it doesn’t cover small-cap stocks or foreign stocks, for example. You should probably have a large-cap fund, small-cap fund, foreign-stock fund and maybe a value fund and a growth fund. If you buy to many funds, you are likely to have overlapping investments and would be less diversified.