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Saving and Investment Instruments in Canada

Most of us have been managing our personal finances for years and have a fair understanding of how Saving and Investment instruments work. However, we must remember that the primary functions of these two terms are different and the outcome may be different if the financial product, to put your money in, is not chosen correctly.

What are Savings?

In crude form, Savings are the leftover funds in a household after all expenses and household expenses include voluntary (based on your consumption behaviour) like eating out vs. cooking at home) and non-voluntary expenditures, which cannot be avoided like house rent, mortgage payments, utility bills etc. You will notice that your savings are inversely proportional to your thriftiness. As per the estimates by Statistics Canada, in 2018, Canadian households saved CA$850 per month. It was also noted that the annual savings increased with age up to the age of retirement.

It is like a piggybank where you keep depositing some money regularly to fulfill certain goals, long-term or short-term.

What are investments?

Investing your money in different financial instruments enables you to reap higher returns over a period of time. If you open a Savings account in Canada, you will not only be assured of the amount you are saving each month but also an additional percentage increment when you withdraw the money. You can consider this as the basic form of an investment as the rate of interest on these accounts is the lowest.

Some common terms used while Investing

Before we look at where you can invest in Canada, let us understand the common terminologies of investing:

Return on Investment

Commonly known as ROI, is referred to as the returns you expect to get on the investments. Generally, this is expressed in the form of a percentage. While some investments guarantee a fixed rate of return, like your savings bank account, the return may not be guaranteed on other inventment like shares/stocks/equities. There is a considerable amount of Risk involved in different financial instruments, even to the extent that you may lose your money; which will mean a negative return on your investment.


Almost every investment has some degree of risk involved. This means there is a possibility that you may not get the expected returns on your investments and even lose money in a few situations. Therefore, the risk involved is the level of uncertainty you have to earn or lose your money in any investment. It is generally measured as High, Medium or Low.

Most often high-risk investments have the potential for higher gains or losses like Shares or equity investments that have high volatility too.

Risk Tolerance

Some people drive cars at high speeds as they love the thrill and some drive slow as they want to be safe. Similarly, many people think twice before they leave everything back and come to Canada and some people never dare move out of their comfort zone due to the fear of uncertainties. This is also applicable when you invest money. Some have a higher degree of risk-taking capabilities and some don’t, this is commonly referred to as risk tolerance.

There are a few factors that make you a risk-taker or a risk-averse:

  • Age – It is seen that younger people have a high degree of risk-taking capacity as compared to older people who are preparing for their retirement
  • Savings – Higher the savings in your account, you are likely to take a higher risk with investments and vice-versa
  • Investment purpose – When you invest with a specific purpose in mind like children’s education, buying a house, planning for a vacation etc. where you don’t want to take high risks with your investments as compared to investing in a new business

Investment Diversification

As the name suggests this is the strategy to manage your investments by allocating funds to different instruments. It is often recommended by the experts as a way to minimize risk and maximize returns on investment.

You can diversify your investments by investing in different asset classes or investment instruments like Fixed Deposits, Stocks/shares, bonds, digital assets like cryptocurrencies, Real Estate etc. In addition, you can create a diverse portfolio within each asset class for example creating a portfolio of different company stocks, mutual funds and Exchange Traded Funds (ETFs).

Tax implications

Many say, forget to breathe but don’t forget to pay the taxes. Most of the investments will have some tax implications, which eventually reduce your net return on investments. Hence, be it the interest earned, dividend on stock, sale of property or cryptocurrency trade, it is extremely important to understand the impact of tax on the investments

Management fees

Many financial institutes like banks and other non-banking financial corporations manage their customers’ funds for fees commonly called as Management Expense Ratio (MER). These could be applicable to Mutual funds, ETFs, portfolio management and even in the cases of recently introduced Robo-advisors. You must consider this amount because this is generally in the percentage (from 0.1% – upwards of 4%) of the funds invested and is charged even if your returns on the investment are negative.

Investment Instruments in Canada

Now that you understand the basics of saving and investments, let us look at some commonly used investment instruments.

  • Savings Account – A regular savings account in a bank will earn you a small percentage of return every month. your money is safe in the bank and you get the promised rate of interest on the amount deposited. Open-ended deposit, which means you can withdraw the money at any time.
  • Savings bond – Consider this to be a secured loan to the government for one year or more, which guarantees a fixed annual rate of interest till maturity.
  • Treasury bill (T-bill) – Similar to a savings bond with a shorter term or less than a year. You don’t earn interest on T-bills, instead, these are sold at a discounted price and mature at face value.
  • Guaranteed Investment Certificate (GIC) – Most of the international students are already aware of this as they need to deposit CA$10K in GIC as proof of funds at the time of study permit application. This is a deposit certificate issued by a financial institution that offers a fixed rate of interest and may have a tenure between 30 days to 10 years.
  • Bonds – A loan to a government or company that is secured by the government’s power to tax or by specific company assets with terms typically ranging from one year to 30 years.
  • Shares/Stocks – Also called equities makes you a part business owner of the company you invest in. Higher the number of shares, the higher your equity in the company. Shares are generally traded on stock exchanges and are usually easy to buy and sell. Shareholders make my in two ways, 1) when the value of the company increases; this, in turn, increases the value of each stock and 2) when the company pays dividends (no guarantees though). The returns on the investment upon the sale of the shares qualify as capital gains (or losses)
  • Mutual fund – A pool of money invested by general investors managed by professional fund managers like investment firms, banks, trusts etc. Returns on investment may include any or all of the following: interests, dividends, capital gains/losses distributed proportionately to each individual investor. A mutual fund continually issues units or shares to investors. The fees and expenses or MER a fund charges to manage the funds are, deducted from the fund’s assets which reduces the returns on your investment. The risk involved depends on what fund you invest in hence the returns are not guaranteed.
  • Exchange-traded fund (ETF) – Similar to mutual funds with a comparatively lower Management Expense Ratio. It holds a similar mix of investments as a stock or bond market index and unlike mutual funds, is traded on a stock exchange.
  • Segregated fund – Simial to mutual funds large pool of investments from many people. It is a market-based investment invested in stocks, bonds or other securities. The difference is that it is an insurance product that comes with insurance coverage with a death benefit that guarantees the amount to the beneficiaries. The segregated fund’s contract comes with a guarantee (usually contracts with 10 years or more) to protect some or all of your investment in case the markets go down.

In closing comments, I will say that you must prepare yourself and know how to manage your finances and have a clear goal-oriented investment strategy that helps you plan for any uncertainties, kids’ education, retirement etc.

Information source and CSA

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