Investments like stocks, mutual funds, or cryptocurrencies carry some level of risk which you might shy away from for a variety of reasons. Whether you’re saving for college, getting ready to buy a house, or nearing retirement, if you’re looking for safer investment options, here are some of the most common low-risk alternatives for Canadians.
While large, traditional banks may only offer minuscule interest rates, some high-yield savings accounts will pay you a reasonable rate of return. Newer, online-only banks offer savings accounts that pay as much as government bonds. Examples include EQ Bank, Motusbank, and Wealthsimple, which each pay at least a 2% annual interest.
High-interest savings accounts can be a great investment option because your cash is liquid—this means you can withdraw your funds whenever you chose without penalty. Plus, savings accounts are insured for up to $100,000 by the Canada Deposit Insurance Corporation, so you won’t lose your money if the financial institution fails. Savings accounts are generally one of the safest places to keep your wealth.
Guaranteed Investment Certificates (GICs)
GICs are similar to savings accounts, however, with a GIC, you agree to lend your money to a bank or financial institution for a specified period, usually at a higher interest rate than you would receive in traditional savings accounts. GIC terms range from as short as 30 days to ten years. Generally, the longer you agree to lend your money with the bank (your term), the higher the interest rate you’ll receive.
When choosing a GIC, you can pick between fixed-rate and variable-rate options. Fixed-rate GICs pay a consistent rate of return over the life of the GIC. On the other hand, the interest rate you’ll receive from variable-rate GICs changes based on Canada’s Royal Bank Prime rate. Compare GIC rates to find the right investment for your situation.
GICs are a great low-risk investment option because the bank guarantees both your principal (the money you invest) and interest. They are especially helpful for Canadians who want to save money for a specific day in the future. For example, if you know you want to buy a home in just over two years, you can put your money in a two-year GIC and enjoy higher interest rates than a savings account.
Canadian government bonds are one of the safest investments you can make. In return for agreeing to loan money to the government, you’ll receive fixed interest payments over the term of your bond. At the end of the term, the government will return your principal. Terms range from as short as one month to 30 years, with longer terms yielding higher returns. Your investments are always 100% guaranteed by the Canadian government, so they’re a good option for investors who want a guaranteed investment.
While slightly riskier than government bonds, corporate bonds are another relatively low-risk investment that can offer higher returns. In return for loaning a corporation money for a fixed period, the company will pay you regular interest payments over the term of the bond. At the end of the term, they’ll return your principal.
Ratings agencies, like S&P and Moody’s, determine the risk level of each corporate bond. If you want to play it safe, go with low risk “investment grade” bonds. If you have a higher risk tolerance, consider investing in high-yield corporate bonds, which are riskier but offer higher returns. Put simply, the risk or “investment grade” is a representation of how likely the corporation is to experience financial hardship or fall into default and potentially be unable to pay out the bond. Higher yields or interest payments compensate for higher risk. Corporate bonds overall are still a relatively low–risk investment as over time have seen a relatively low incidence of default and may be a good option if you’re investing for the long-term, without any immediate needs for cash.
There are lots of choices when it comes to low-risk investment options. Tools like a savings calculator can help you visualize how quickly you can grow your wealth through savings accounts and investment products.