Differences between guaranteed and non-guaranteed investments

Find out how to distinguish between guaranteed and non-guaranteed investments and how they can help you reach your financial goals.

Investment and saving strategies can vary from one person to another depending on their financial situations, objectives, and risk tolerance. If you want to save or invest, it may be wise to learn more about the different products available. Savings products are divided into two main categories: guaranteed and non-guaranteed investments. Here are four key points to help you make the right choice when shopping for investments.

What is a guaranteed investment?

A guaranteed investment is a product whose principal and return are guaranteed by a government or financial institution to which money is loaned in exchange for interest.

One of the advantages of a guaranteed investment is that you know its value at maturity. However, several conditions may apply. To ensure that you recover the amount invested, you may, for example, have to hold your investment until maturity. If you don’t, your return may be lower than expected, and you may even lose money.

Types of debt securities

Guaranteed investment certificates (GICs): maturities ranging from 30 days to 10 years

The investor lends money to a financial institution that, in addition to guaranteeing repayment of the principal, will usually pay interest at a fixed rate until maturity. However, returns on index-linked GICs depend on the performance of a stock market index.

Bonds: maturities ranging from 1 to 30 years

The investor lends money to a government or corporation and receives periodic interest payments, usually calculated at a fixed rate, plus a predetermined amount, often a multiplier of $1,000, at the time of purchase if the security is held to maturity. However, the guarantee is valid only if the company is still in operation at that time. For example, if a company declares bankruptcy, the bond’s guarantee is no longer valid.

Principal-protected notes: maturities ranging from 5 to 10 years

The investor lends their money to a financial institution and gets their principal back at maturity, plus interest. Returns may vary depending on several factors, such as the performance of a benchmark portfolio or the value of certain assets.

01 Think about your risk tolerance

Knowing your investor profile is essential to choosing the investments and strategies that are right for you. Factors such as your age, financial situation, investment horizons, and goals will help determine whether you’re a conservative, moderate, or aggressive investor.

Generally, individuals with a higher risk tolerance are more likely to opt for non-guaranteed investments, such as shares, mutual funds, and exchange-traded funds, while investors less comfortable with risk tend to prefer guaranteed investments.

AMF deposit protection: Sheltering investors

In Quebec, if an institution is unable to pay when your investment reaches maturity, the Autorité des marchés financiers (AMF) is responsible for reimbursing the principal and interest on your protected deposits. In other words, deposit protection helps safeguard your money if your financial institution goes bankrupt.

As not all guaranteed products are insured, it’s important to find out if your investments meet the requirements. Protected investments include deposits in a chequing or savings account, as well as Canadian dollar term deposits with an original term to maturity of no more than five years. On the other hand, mutual funds, shares, bonds, foreign currency deposits, mortgage investments, and cryptocurrencies are not insured.

02 Choose investments that align with your goals

While it’s essential to consider your risk tolerance when choosing investments, it’s equally important to identify your saving goals. Your ideal investment strategy will vary depending on whether you need money in the short or long term. For short-term projects, you may prefer to remain conservative and invest a smaller proportion of your portfolio assets in stocks; however, you won’t benefit from an upturn in the market. If you have a longer investment horizon, you may be inclined to take a risk and invest more in stocks, which are subject to market volatility and have the potential to generate higher returns.

03 Shop around for rates and conditions

Keep in mind that a product’s return, maturity date, and redemption conditions can vary depending on the financial institution. In addition, some types of investments protect both the amount invested and the return, while others protect only the principal. It should also be noted that not all banks offer the same guaranteed investments or return rates.

For example, some offer fixed-rate GICs and others, variable-rate GICs. With the former, you know even before you invest how much interest you’ll receive at maturity. With the latter, rates can fluctuate over the term of the GIC, usually according to your financial institution’s prime rate. In general, the longer the investment term, the higher the interest rate, regardless of the type of investment.

04 Consider the impact of management fees

The final major difference between guaranteed and non-guaranteed savings products? Management fees.

Actively managed non-guaranteed products, such as mutual funds, generally have the highest management fees and the greatest return potential.

However, you can purchase a GIC, for instance, without paying any fees, as long as you don’t cash in your investment before the maturity date, which can sometimes result in a penalty.

Since the financial institution is covering its own costs, it will aim to make a profit using your deposit. Once it has paid you interest on your investment, it can turn around and lend your money to borrowers at a higher rate.

Since management fees can have a significant impact on returns, it’s important to be aware of the different types of investment products. Make sure to compare interest rates between financial institutions before investing.

Whether you’d like to set money aside for a passion project or maximize your retirement savings, understanding the differences between guaranteed and non-guaranteed investments is key. Don’t hesitate to speak with a financial expert who can help you make informed decisions.

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