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Feb 2, 2015

Low Risk Investment Options For Your RRSP

by Tahnya Kristina

It's that time of the year again, the time to decide how to invest your RRSP contribution. If you're like many Canadians you probably don't even think about your RRSP until after the New Year; but now we're well into February and the RRSP contribution deadline of March 2nd is quickly approaching. Herein lies the question, how are you going to invest your RRSP money this year?

As a financial planner the only question I get this time of the year from clients is "Can you make an RRSP contribution for me?" Of course my answer is always "Yes" quickly followed by "How do you want to invest?"

There isn't a one size fits all answer to the best investment option. My job as a financial planner is to make sure everyone has the best investments based on their own individual needs—after all that's why it's called personal finance.

Joe Snyder, Product Analyst, Tangerine Investments says "The majority of Canadians tend to invest based on recommendations from their financial advisor because they often feel overwhelmed by where to start and what to invest in." Does that sound like you? Here are two low risk investment options for your 2015 RRSP contribution.

Market Linked GICs

Market Linked GICs are an investment option if you want security of capital but don't need a guaranteed interest rate. If a guaranteed investment and the stock market had a child it would be a Market Linked GIC. They're the perfect balance between having the security of a guaranteed investment and the potential risk associated with investing in the stock market. 

With traditional GICs you invest a lump sum of money with a bank for a specific term in exchange for a guaranteed annual interest rate. An example would be if you invest $10,000 for 15 months with TD Canada Trust and in exchange they give you a guaranteed rate of 1.55% on your money for the entire term. 

Market Linked GICs are a little different. The interest rate is not guaranteed because it depends on how the stock market performs over the term of the investment, usually three years. At the same time there is absolutely no risk taken on your original capital investment, it's absolutely guaranteed and on top of that the capital is also insured by the Canadian Deposit Insurance Corporation.

RBC Royal Bank's Market Linked GICs are called RBC MarketSmart GICs and they're described as "security and market potential—in one investment". MarketSmart GICs can be linked to the market of your choice: U.S., global or Canadian. Even if the market has a negative return over the term of your investment you are still guaranteed to get back your capital investment - you just won't earn any interest on it. However if the market performs well you could have a substantially higher interest rate than if you invested in a traditional GIC.

Bond Mutual Funds

When you hear the term mutual funds do you automatically think risk? The answer is probably yes and that's OK. It's not true, but it's OK because associating risk with mutual funds is a common mistake made in the world of investing. As a financial planner I can tell you that all mutual funds do have some level of risk but they aren't all high risk.

If you visit the mutual funds page of your bank's website you will find all of their mutual funds listed in order of lowest risk to highest risk. Money Market Mutual Funds are usually the first investment option listed and Income Mutual Funds are usually the second—Bond Mutual Funds are a type of income fund.

If you want low-risk exposure to the stock market and are comfortable with small fluctuations in the value of your capital investment for the potential of a higher rate of return then Bond Mutual Funds may be the best investment option for your RRSP. Bond Mutual Funds are considered to be low risk investments because they provide stability—but not guarantee—of capital with the potential for a monthly income distribution. I like to recommend Bond Mutual Funds to clients who are new to investing and aren't yet sure if they are comfortable taking risk.

So often clients come to see me and say they want a really high rate of return and they're willing to take a lot of risk to get it. The problem with this is that very often clients only think of the best case scenario a.k.a. a booming market, so when the worst case scenario happens a.k.a. the market crashes and the value of their investments drops they freak out and sell. That's bad investment behaviour. The truth is the majority of clients I see during RRSP season aren't realistically willing to take extreme high risks with their money.

If this sounds like you then maybe Bond Mutual Funds are just what your RRSP needs. Scotiabank describes their Bond Mutual Fund as "(providing) a high level of regular interest income and modest capital gains. It invests primarily in Canadian dollar-denominated investmentgrade debt instruments issued by Canadian governments and corporations."

Will your capital fluctuate with Bond Mutual Funds? Yes. Should you earn a decent rate of return in exchange for small risk? Yes. This is a good investment if you plan to leave your money in your RRSP for at least three to five years and if you want some market exposure without big risks to your capital investment.

Maybe Your RRSP Needs Professional Advice

Whether you want low risk, high risk or no risk for your RRSP investments this year, seeking the advice of a professional will make sure your money gets invested the best way, for you. Options are the key to a successful RRSP season says Snyder "Our aim (at Tangerine) is to provide Canadians with the ability to bank where they want, how they want, and when they want. The easier and more convenient we make it for Canadians to bank, the better."

Remember that a good investor is a well-educated investor, before you decide to invest, it's important to understand the risks involved. The RRSP contribution deadline of March 2nd is quickly approaching so log into your online banking, call customer service or visit your local bank branch to find out more information on your investment options this RRSP season.

Tahnya Kristina is a certified financial planner and professional financial writer with 14 years of experience. She enjoys helping people pay down their debt, make smart investment choices, learn to stay on budget and achieve financial success. You can contact her on her website at tahnyakristina.com or via Twitter @TahnyaKristina.

For an opposing view on Market-Linked GICs, please see Tom Bradley's article in the January 2015 Canadian MoneySaver.