What are the 7 best low-risk investments in Canada?

Finding the most suitable investment vehicle starts with determining risk appetite and tolerance

What are the 7 best low-risk investments in Canada?

If you want to start investing, then you can consider some of these seven low-risk Canadian investment vehicles. Most will let you start earning some return, while also keeping your capital near to hand so you can buy what you need – a house, car, or retirement – when you need it.

What is considered a low-risk investment?

Low-risk investments are a critical part of a well-balanced investment portfolio. They can provide you with reliable, albeit smaller, returns without putting your capital at risk. When the stock market is volatile, these investments maintain your investment growth while leaving you stress-free. If you can invest for a longer time, find a financial advisor, who can help you put money in more lucrative instruments. 

Low-risk investments can range from cash investments that earn a fixed amount of interest to investments in low volatility stock market securities. What you chose will depend on your risk tolerance and purpose for investing, so work with an advisor to assess those to meet your savings goals.

Low-risk vehicles can also allow you to create – or recreate – an emergency fund, which helped many in the pandemic, but now may need replacing. You should have three to six months of ready funds in you case you lose your job or have health issues or an unexpected expense.

Seven Low-risk Investments

1. High-interest Savings Account

This vehicle is the safest investment you can get – even safer than a chequing account, which may pay little or no interest. High interest, or high yield, savings accounts have very low interest rates, but some newer players on the financial scene may offer up to 2% interest annually. Funds in savings accounts, unlike some of the other options below, are totally liquid, so you can withdraw your money any time with no penalty. The Canadian Deposit Insurance Corporation (CDIC), an insurance company for bank accounts, guarantees savings deposits of up to $100,000 if your bank folds, which isn’t likely in Canada.

2. Guaranteed Investment Certificate (GIC) or Term Deposits

GICs or term deposits are as safe as savings accounts since your capital is not at any risk, but they’re not as liquid. They provide a fixed rate of return over a fixed term. While they may offer higher returns than savings accounts, you also must commit your money to them for a set period of time, or “term,” which may be as little as 90 days or as long as five years. Generally, the longer the term, the higher the interest rate, though rates aren’t very high these days. At the end of the term, your deposit matures and then you can withdraw both your principal and interest without any penalties. If you want to get your money back before the term ends, you’ll lose interest and probably must pay a penalty. So, only put your money in one of these if you won’t need it for the term. As with savings accounts, the CDIC will pay up to $100,000 for deposits of five or less years if your bank fails.

3. Money market funds

Money market funds are low-risk mutual funds that invest in high-quality, short-term government and corporate bonds, so your money stays liquid. They’re safe places for your money, but unlike savings accounts or GICs, the CDIC doesn’t guarantee them if your bank fails. They’re being replaced with new investments with better returns and lower fees since money markets funds’ returns don’t usually rise much above the cost of holding them. These funds have a low risk of losing value and are usually offered by financial institutions, such as banks. However, their high management fees can really eat into your returns, so these funds usually provide lower returns than a high interest saving account and you’re better to keep your cash elsewhere.  

4. Annuities

An annuity is a type of retirement insurance that will pay you a fixed amount each year for a fixed time – even the rest of your life. It’s a protection against outliving your savings. You buy the annuity for a premium of $50,000 or more, and it will grow with interest and dividends while you receive a fixed amount from it every month, quarter, or year for the term. Because fixed annuities provide a guaranteed income, your only real risk in having one of these is dying before you get your investment back in payments. While it’s an attractive low-risk investment vehicle, you usually only buy an annuity when you retire. So, it’s not a tool for younger investors, although you could start young and build up your cash to buy an annuity in several decades, when you retire. 

5. Low Volatility Fund

A low volatility fund is an investment vehicle that puts your cash in low-risk securities on the stock market. While this vehicle has more risk than a savings account or GIC, it has considerably less risk than a traditional index fund on the stock market. If you want to invest in a low-volatility fund, find a low-volatility exchange-traded fund, or ETF, through a bank or brokerage.

6. Dividend Paying Stocks

Dividends are one of the more dependable parts of equity investing. They’re a regularly issued part of a company’s corporate profits, which are paid on a per-share basis, regardless of whether a stock increases or decreases in value. Many investors try to find long-term positions in stocks with dividend yields and depend on the income dividends offer to finance their lifestyle, particularly when they retire. But, you can encounter many pitfalls as a dividend investor and any stock investment has more risk than the five methods above. 

7. Corporate Bonds

Companies also issue bonds, which range from relatively low risk (for large, profitable companies) to high risk. The lowest of these are called high-yield or “junk” bonds. Bonds can have: 1) interest-rate risk if a bond’s market value changes as interest rates change or 2) default risk, if the company fails to make its interest and principal payments, so you don’t earn anything. Investors may select bonds that mature in a few years to mitigate interest-rate risk. Longer-term bonds are more sensitive to interest rate changes. To lower default risk, investors can select high-quality bonds from large, reputable companies or buy funds that invest in a diversified bond portfolio.