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

Updated: November 21, 2023

When you read the news, it’s easy to see that today’s economic climate is uncertain. That’s why when it comes to investing, it’s wise to consider investments that can help preserve your capital while minimizing the risk of significant losses. Fortunately, in Canada, a country renowned for its strong and stable financial system, there are several low-risk investments its citizens can put their money into.

In this article, Wealth Professional shares some details on at least seven of the best low-risk investment options in Canada. Whether you are an experienced investor or have only just embarked on your investment journey, you can use this information to assemble a resilient investment portfolio. 

Financial advisors and wealth professionals who are regulars to this site can share this article with clients who are exploring investment options.

The risk-return tradeoff in investments

Before getting into the actual list of the best low-risk investments in Canada, it’s crucial to understand the risk-return tradeoff. So, what is this concept in terms of investments?

This simply states that the potential returns of an investment are directly proportional to its risk. The higher the risk, the higher the return. And conversely, the lower the risk of an investment, the lower its returns.

Here are the types of low-risk investments you can choose to include in your portfolio:

1. High-Interest Savings Account

As the name implies, a high-interest or high-yield savings account works just like any other traditional savings account, but with the added benefit of giving higher interest on your deposit. This is not strictly an investment, although it has some merits and is worth considering when putting together a strong investment portfolio.

The higher return on your deposit here is considered as the “high yield” component of your HISA (or HYSA). A HISA offers a higher degree of safety and reliability than a chequing account. Most chequing accounts offer little to no interest earnings.

While high-interest savings accounts typically offer interest rates of less than 2%, that is not necessarily true of all financial institutions anymore. If you want to make one or more high-interest savings accounts part of your portfolio, consider some of these banks which can give higher returns on their HISA offerings.

Why invest in a High-Interest Savings Account?

There are a few reasons why it’s worth investing in this. For one, a HISA is easily accessible, since it’s offered by the Big Six banks of Canada, other smaller banks (including digital banks), and even credit unions.

Another reason is that it probably has the lowest risk for giving modest returns on your deposit. You’ll likely never lose money on a HISA either, as your deposit is insured up to $100,000 by the Canada Deposit Insurance Corporation (CDIC).

Possible drawback:

• Earnings on a HISA may not be enough to beat inflation

2. Guaranteed Investment Certificates (GICs)

Also called Term Deposits, GICs are as safe as savings accounts. In a GIC, your capital has virtually no risk, but its main drawback is that it has low liquidity; i.e., not as easily bought, sold, or converted into usable currency.

Another disadvantage to GICs is that for an investor to get higher earnings, they must commit their money to longer terms. The terms of a GIC can range from 90 days to five years; the longer the term, the higher the earnings.

Why invest in GICs?

The “G” in GIC doesn’t mean “guaranteed” for nothing. At the end of the term, a GIC deposit matures, and investors can withdraw the principal and the earnings – this is guaranteed. What's more, there are no penalties when collecting the principal and earnings once a GIC matures. However, if the money is withdrawn prematurely, the account holder can lose interest earnings and, worse, pay a penalty.

Not only is a GIC guaranteed to earn at a fixed rate, but it also enjoys protections like those of savings accounts. The CIDC guarantees GICs amounting to at most $100,000 with terms of five years or less. So even if the financial institution holding your GICs fails, you’ll still get your money back.

Possible drawbacks:

• A GIC isn’t advisable if you need money in the short term
• You have to leave your money untouched to maximize its earnings
• While your money is locked in a GIC, you could lose out on other better opportunities

For instance, instead of locking your money away in a GIC, you could place it in a mutual fund.

3. Money Market Funds

Money market funds are a type of mutual fund that even savvy investors may gravitate towards, as they are the low-risk sort. What’s also attractive about money market funds is that they can give dividends.

As this type of low-risk investment has high liquidity, many seasoned investors prefer to invest here as a way of storing cash. It’s also a good alternative to investing in the stock market.

Money market funds have low risk and high liquidity because they are invested in high-quality, short-term corporate and government bonds.

Why invest in a money market fund?

Just like savings accounts, money market funds are very safe. They are low risk in the sense that they don’t drastically lose their value over time.

Another advantage is that some of them are offered and managed by big banks.

Possible drawbacks:

• Management fees can be high and take a chunk out of your returns
• Returns can be lower than even an HISA
• Investment isn’t protected or guaranteed by the CDIC
• May be better suited to investors who are looking at long-term growth

4. Low Volatility Fund

A low volatility fund (LVF) places your cash in low-risk securities on the stock market. Although this vehicle has more risk compared to a GIC or HISA, it still has much less risk compared to investing in an index fund on the stock market.

Why invest in a low volatility fund?

Individual investors who are new to the business can look to a LVF if they’re less experienced and even less inclined to devote time to researching individual stocks or funds. Should you want to invest in this vehicle, choose a low-volatility Exchange-Traded Fund or ETF offered by a bank or brokerage company.

Possible drawbacks:

• Tend to get impacted by bear and bull phases in the stock market, even if they aren’t actual stocks
• While value of LVFs isn’t affected as much in a bear market, it can underperform in a bull market and won’t reap these benefits as much

5. Annuities

This is a type of retirement insurance that pays a fixed amount each year for a fixed time, which can last for the rest of your life.

Fixed annuities provide investors with a guaranteed income. You can usually purchase an annuity for $50,000 then use it as your retirement fund.

Why invest in annuities?

Annuities can work as an investment that helps you avoid outliving your savings when you retire. The annuity can grow with interest and dividends as you receive a fixed monthly, quarterly, or yearly income for its term.

Possible drawbacks:

• Annuities can be costly and provide comparatively modest returns
• Initial investment is high, so investors may have to start saving while young before they can buy an annuity
• It’s limited to being a retirement vehicle; it’s not an investment for young people

6. Dividend-Paying Stocks

This is one of the more dependable investments when it comes to equities. Dividends are regularly issued by corporations as part of their profits and are paid based on share prices. Regardless of whether the share price rises or falls, these stocks will issue dividends.

Why invest in dividend-paying stocks?

Dividend-paying stocks have been shown to perform better than non-dividend-paying stocks in a bearish market. During these periods, stocks that pay dividends see their value decline less as well, while other stocks across the board experience sharper reductions in value.

In addition to their resilience, dividend-paying stocks offer two kinds of returns: regular income from dividends and capital gains on the stock price.

Possible drawbacks:

• Dividend-paying stocks have more risk compared to the other low-risk investments
• Depending on the performance of the stock market, dividends may not be as high as investors would like

7. Corporate Bonds

A bond is a form of obligation to pay a debt. Investors who buy corporate bonds lend money to the company that issued the bond.

Companies use bonds to upgrade facilities, fund expansion, or other business activities. In return for the money lent by investors, the company makes a legal commitment to pay interest on the principal and, in most cases, to return the principal when the bond matures after some years.

Why invest in corporate bonds?

Corporate bonds can be relatively low risk if issued by large, profitable companies. The bonds with the lowest risk are often called high-yield or “junk” bonds.

Investors can choose bonds with terms of a few years to maturity as a way of offsetting the risk of changes in the interest rate. To decrease the risk of company defaults on bonds, investors can choose high-quality bonds from reputable companies. That, or purchase funds that are invested in a diverse bond portfolio.

Possible drawbacks:

• If the company doesn’t make good on its principal and interest payments (defaults, in other words), investors earn nothing
• Corporate bonds have interest rate risk, which means the bond’s market value changes as interest rates change

Here’s a video that lists low-risk investments with high returns. You’ll notice that real estate is part of the mix, but that could be prohibitive for beginning investors due to the relatively higher risk.

Diversification: minimizing risk through allocation

What is diversification? In simple terms, this is the practice of spreading your investment money around among different investments to reduce or minimize risk. Probably the best way to sum this up is with the adage of “not putting all your eggs (in this case, money) in one basket (type of investment).

Diversification through allocation of investments is a sound strategy, done in the hopes that the losses of one investment will be offset by the gains of other investments.

The way to maximize this strategy is to diversify your portfolio in two levels:

1. Across asset categories
2. Within asset categories

For example, if you were to start putting together a diverse portfolio, make sure to include different investments. Don’t concentrate on a single asset category or class. Mix it up with stocks, bonds, high-yield savings accounts, mutual funds – whatever fits your budget.

Next, take a closer look at one of the classes – say, mutual funds – and diversify your allocations within them. For instance, invest in some money market funds along with index funds or other funds, so your collection of mutual funds alone is diversified too.

Factors to consider when choosing low-risk investments

Choosing the best low-risk investment for you isn’t as simple as picking the one that gives the biggest returns. For a low-risk investment to be worth your time and money, there are a few factors involved:

Financial goals

What are the reasons for getting into investing in the first place? It’s important to determine your financial goal first, because that’s what will help you flesh out the other factors you must consider.

Some examples of common financial goals are:

• Building a retirement fund
• Saving for a first home
• Saving for a college fund for the children
• Raising capital for a small business

Budget

Knowing your budget can help decide which of the low-risk investments are available to you. Choose only the investments you can afford; don’t borrow money to invest.

Risk tolerance

Also known as risk appetite, this is a measure of how much risk an investor is willing to take to reach a certain amount or level of returns. A simple way to determine your risk tolerance is to ask yourself how much you are willing or can afford to lose in investing. Choose the investment that, if it incurs losses, will still be within your risk tolerance.

Time horizon

This is the "deadline” for when you need the money or plan to use the money you invested. In general, your time horizon is directly proportional to the risk you can afford to take.

For instance, if you are saving for retirement, you have the luxury of choosing investments with higher risk, since you still have plenty of time to recover from unexpected losses.

A goal with a shorter time horizon, such as saving for a home, means you have less time for recovery if there’s a market downturn and therefore smaller risk tolerance.

What’s the best low-risk investment for you?

Choosing the best low-risk investments is never a one-size-fits-all situation. Your goals, timeline, budget, and risk tolerance can be unique, so the best strategy is to pick the investments that best suit them.

Should you find it difficult to figure out which low-risk investments to put money into, don’t hesitate to ask a financial advisor.

Did you find this article an eye-opener for low-risk investments? What did you discover about your financial goals and risk appetite? Let us know your thoughts in the comments!