5 Best Short-Term Investments In Canada (2023)

If you are planning to invest for a shorter period of time, you may be wondering what investment options are appropriate for you.

Although investing is generally a long-term endeavour, it is also possible to grow your money over the short term by investing in very conservative asset classes.

A study from Ipsos outlined that roughly 25% of Canadians’ investment composition was in cash or cash-like instruments. Keeping your assets in cash or cash-like instruments usually indicates that you are keeping your liquidity high in order to meet a short-term goal.

I will go over the best short-term investments in Canada below and discuss some of their features.

Short-Term Investing

Investing with a short investment timeframe typically refers to situations in which your money will stay invested for less than five years. Investing for such a short period of time typically requires choosing safe asset classes, especially if your goals for the end of the investment time period are very important.

If you are in an environment where inflation is high, you will want to try your best to ensure that any excess cash you are not currently using is growing and preserving its purchasing power.

Safer asset classes generally come with returns that are closely tied to the level of interest rates in the economy. When the level of interest rates in an economy is higher, safe investments will yield a higher return and vice versa.

If you do not need liquidity in the very short term, you can consider looking at asset classes with maturity dates aligned with your short-term goals. An example would be to purchase a two-year guaranteed income certificate (GIC) if you are looking to grow your money over the course of exactly two years.

5 Best Short-Term Investments in Canada

1. High-Interest Savings Account (HISA)

  • Risk: low
  • Fees: none
  • Liquidity: high

High-interest savings accounts (HISAs) are a low-risk investment option that can help you grow your money with minimal volatility. HISAs are available at many financial institutions across Canada, including major banks and smaller institutions.

HISAs are similar to GICs, but do not have a fixed term for your deposits. Like GICs, HISAs pay an interest rate that is based on the current rate set by the Bank of Canada. The interest rate on a HISA may be higher when overall rates in the economy are high and lower when rates are low.

HISAs are designed for minimal withdrawals and do not offer the same level of flexibility as a checking account when it comes to transactions and paying bills. Most HISAs are also insured by the Canada Deposit Insurance Corporation for up to $100,000.

Big banks and other reputable financial institutions often offer lower interest rates on HISAs because they have a large customer base, while smaller institutions may offer more competitive rates to attract new clients. HISAs typically have low minimum deposit requirements and do not charge management fees.

Unlike GICs, the interest rate on a HISA will fluctuate with changes in the overall level of interest rates in Canada. While the interest rate on a GIC can be locked in for a long period by purchasing a long-term GIC, the rate on a HISA will adjust over time to reflect changes in overall interest rates.

Researching HISAs does not require a lot of time, and there is no set investment horizon for using a HISA. It is a good option for parking cash that does not have another immediate use.

The amount of interest you can earn from a HISA may be significant or fairly low, depending on overall interest rates. For example, the current EQ Bank savings rate is an excellent 2.50%.

It is important to note that the interest rate on a HISA may not be enough to offset the overall level of inflation in Canada.

If you are familiar with trading or investing through ETFs, high-interest savings accounts are also sometimes packaged through ETFs.

Take a look at my article on the best high-interest savings account ETFs in Canada for some ideas.

2. Guaranteed Investment Certificate (GIC)

  • Risk: low
  • Fees: none
  • Liquidity: low – high

Guaranteed Investment Certificates (GICs) are financial products that allow you to deposit money with a financial institution for a set period of time in exchange for a fixed interest rate. The interest rate on a GIC generally reflects the level of interest rates in Canada.

GICs can be either cashable or non-cashable. Cashable GICs can be redeemed before their maturity date, but this often involves giving up a significant portion or all of the earned interest. Non-cashable GICs cannot be redeemed early, but they often offer higher interest rates to compensate.

GICs are generally considered low-risk investments in Canada and are insured by the Canada Deposit Insurance Corporation for up to $100,000 (including principal and interest).

Major banks and other well-known financial institutions tend to offer lower GIC rates due to their large customer base, while smaller, lesser-known institutions may offer more competitive rates to attract new business.

GICs usually have a low minimum investment amount (typically around $500) and do not come with any fees. They are also relatively simple investments, requiring little due diligence beyond choosing the right financial institution.

GICs can have short maturities of just a few months or longer terms of several years, and their liquidity depends on whether they are cashable or non-cashable.

Finally, GICs pay an interest rate that can vary based on changes in the overall level of interest rates. For example, a 1-year GIC at EQ Bank is currently at 4.85%.

If interest rates are currently high but expected to decrease in the future, you may want to lock in a high-interest rate with a long-term GIC. If interest rates are low but expected to rise, it may be a better idea to choose a shorter-term GIC.

In my article on whether GICs are worth it in Canada, I cover GICs in much more detail.

3. Term Annuity

  • Risk: low
  • Fees: low
  • Liquidity: low

A term annuity is a financial product that provides a guaranteed stream of income payments for a specific period of time. It is a type of annuity, which is a contract with an insurance company that is designed to provide income during retirement or other periods of financial need.

Term annuities differ from other types of annuities in that they have a fixed term, or length of time, during which the income payments are made. Although they can be long-term in nature, short-term annuities are usually available at most life insurance companies in Canada.

To purchase a term annuity, the investor typically pays a lump sum of money to the insurance company, which is known as the premium. The insurance company then invests this money and uses the earnings to fund the income payments to the investor.

Term annuities are generally considered a safe investment option because they offer a guaranteed stream of income for a set period of time. They can be especially appealing to people who are approaching retirement and want to ensure that they have a steady source of income to cover their expenses.

However, term annuities also have some limitations. Life insurance companies typically offer annuity returns that are closely tied to interest rates, meaning that you will likely be earning conservative returns.

In addition, the income payments from a term annuity are generally fixed, which means they are not adjusted for inflation. This means that the purchasing power of the income payments may decrease over time as the cost of living increases.

Term annuities are offered with very low fees (which can sometimes be negotiated to zero) and are usually illiquid.

Overall, term annuities can be a good investment asset class if you want a guaranteed stream of income for a set period of time.

4. Short-Term Bond Funds

  • Risk: low
  • Fees: low
  • Liquidity: high

Short-term bond funds are mutual funds or exchange-traded funds that invest in a portfolio of bonds that usually have maturities of three years or less. Although many types of bonds exist, I recommend government bonds for additional safety when investing for the short term.

When it comes to choosing between mutual funds and ETFs, I recommend considering exchange-traded funds since they are generally offered at a lower management expense ratio than mutual fund counterparts.

The main advantage of short-term bond funds is that they tend to be less sensitive to interest rate changes than longer-term bond funds. This means that the value of the bonds in the fund is less likely to fluctuate significantly due to changes in interest rates.

Short-term bond funds also offer the potential for a modest level of income, with yields that are typically higher than those of money market funds but lower than those of longer-term bond funds. The income generated by the fund is distributed to investors on a regular basis, typically monthly or quarterly.

Relative to more aggressive investment strategies, the returns offered by short-term bond funds can seem very conservative. In exchange for this, short-term bond funds typically experience low levels of volatility, including during periods of market stress.

While short-term bond funds may not offer the same level of income potential as longer-term bond funds, they can be a good choice for investors who are looking for a relatively low-risk investment with a moderate level of income and a high level of liquidity.

If you are looking for some bond ETF ideas, make sure to read my guide on the best fixed-income ETFs in Canada.

5. Individual Bonds

  • Risk: low
  • Fees: low – medium
  • Liquidity: low

Another short-term investment in Canada can include purchasing individual bonds. This process is usually more complex than purchasing a bond mutual fund or ETF.

Bonds do not trade on an exchange like stocks or ETFs after they are issued. Bonds trade over-the-counter (OTC) and will have to be bought directly through your brokerage’s fixed-income department.

Although bonds are usually issued with a long investment time horizon, the best approach for investing in individual bonds with a short investment time horizon is to purchase bonds that only have a short period of time until maturity.

Be mindful that purchasing individual bonds typically comes with a higher minimum investment requirement than purchasing units of a bond ETF. It is also significantly harder to properly diversify a portfolio of individual bonds (which a bond ETF does very well).

If you are looking to keep your investment risk to a minimum, you will want to purchase government bonds that currently have a maturity date that matches your investment time horizon.

Corporate and municipal bonds may offer a higher yield (and, therefore, a higher return) but typically come with additional risk and volatility.

Although bonds can be sold early before their maturities, they tend to be somewhat illiquid since they are traded over the counter. Individual bonds are much more illiquid than bond ETFs and are much more tedious to handle by the average Canadian investor.

In order to trade individual bonds, most brokerages will require you to place orders on the phone by calling your brokerage’s bond desk.

Investing in individual bonds is an option if you are looking to hold one or more bonds to maturity over the short term, although the other asset classes on my list are likely less complex options.

Conclusion

Investors that are looking to invest for the short term typically have one or more important goals that they have set money aside for in the near future. If these goals are especially important, it is critical to pick short-term investments that also come with little risk and as little volatility as possible.

Most short-term investment ideas are also low-risk investment asset classes. These investments usually offer returns that are closely linked to the level of interest rates in Canada.

If you are looking for more ideas about where to put your money in order to have it grow, be sure to read my guide on the best investments in Canada.

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Author Bio - Christopher Liew is a CFA Charterholder with 11 years of finance experience and the creator of Wealthawesome.com. Read about how he quit his 6-figure salary career to travel the world here.

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