Investing might sound scary right now, considering the giant hits the global economy has taken in the last year. However, in times like these it is smart to stash your extra cash where it can benefit you the most.
Mutual funds are a great option for people prepared to chance the market without the risk of putting their money into individual stocks.
They allow people to buy units in mutually owned investments held in a fund run by professionals. These funds are made up of assets in an array of companies, spreading out the risk.
This means if there is poor performance by one or several of the companies the fund holds assets in, there is a good chance several others are doing well, hopefully balancing it.
However, it is important to keep in mind such funds have a certain amount of risks tied to them so research is a must. It is important for investors to always look into what companies the fund invests in and how much.
A fund might invest in a wide variety of junior mining companies with different amounts of money invested in each depending on its predicted performance.
However, they are all junior mining companies. While a fund may be diversified, it is important to know how it is diversified.
Business and personal finance magazine are a good option for research. Canadian Business Magazine posts the top and worst mutual funds over five years .
Bonds are another good option to look to. In purchasing them, money is loaned to a specific company and the purchaser gains interest in return over a fixed period of time.
After this set period of time, when the bond matures, the purchaser receives his or her initial investment back.
The cost of these bonds depends on many factors such as market interest rates, the time the bond will take to mature and how easy it is to buy and sell the bond. The credit quality of the company you are dealing with and where the bond ranks if the company were to go under are also factors.
In the case of Canada Savings Bonds (CSBs), the purchaser is loaning money to their country. The CSB, which is cashable at any time, has a minimum guaranteed interest rate.
Although it can fluctuate, it will never fall below the posted rate for that period. Canada Premium Bonds (CPBs) offer a higher rate upon purchase, however, they do not fluctuate with the market and they can only be cashed once a year within 30 days of the original purchase date.
These bonds are backed by the federal government, and can be purchased with funds in Registered Retirement Savings Plans or Registered Retirement Income Fund (RRIF).
They can be purchased for as little as $100 by phone, through a bank or wherever the purchaser invests. CSBs are available early October through to April 1.
People can contribute to RRSPs as an individual or along with a spouse or common-law partner. While the money remains in the plan, it is usually tax-free and can be used as a deduction on taxable income.
Generally though, taxes must be paid when the plan is cashed in, withdrawn from, or if regular payments are received from it in the form of RRIF.
An RRSP can be a great option for people saving up for their first home. The Home Buyers Plan, as of January, allows people to withdraw up to $25,000 from their RRSP tax-free.
This money is to be put toward buying or building a first home, or toward a home for a relative with a disability.
However, people taking advantage of this plan must set up a schedule to repay the money to their RRSP within 15 years, otherwise the money withdrawn will be taxed. The Lifelong Learning Plan (LLP) is a similar program designed to fund educational endeavors.
Money can be removed from RRSPs to finance education and training for yourself or your partner. However, people can’t use this plan for their children or those of their partner. A Registered Education Savings Plan however, is useful for this.
And for a similar option, any Canadian citizen over the age of 18 with a valid social insurance number can set up a tax-free savings account (TFSA). Available this year, TFSAs encourage Canadians to save money. All interest earned in these accounts is tax-free, even when withdrawn.
However, contributions are not deductible from taxable income, unlike with RRSPs. Only account holders can make contributions to these accounts, and up to $5,000 can be contributed yearly. Any amount over $5,000 will be taxed one per cent monthly.
According to Revenue Canada “the types of investments that will be permitted in a TFSA are the same as those permitted in a registered retirement savings plan (RRSP). This would include mutual funds, securities listed on a designated stock exchange, Guaranteed Investment Certificates (GICs), bonds, and certain shares of small business corporations.”
So, for those looking to see growth in savings, or simply to preserve a nest egg, one or several of these options are worth looking into.