BMO Financial Tip of the Week: Understand What You Can Hold in Your RRSP
TORONTO, ONTARIO--(Marketwire - Feb. 22, 2012) - As part of BMO Financial Group's ongoing commitment to financial literacy and 'Making Money Make Sense' for Canadians, BMO is releasing a financial tip every week in 2012. In addition, BMO will be providing daily retirement tips during the month of February.
BMO's Financial Tip of the Week:
Understand what you can hold in your RRSP
When it comes to investments, Canadians have a myriad of options. Rather than trying to learn everything there is to know about every product out there, get familiar with some of the most common products on the market. This will help you make better decisions when it comes to investing in your Registered Retirement Savings Plan (RRSP).
While many products have similar characteristics, they provide different results and fulfill different roles:
Bonds are loans issued by governments as well as corporations, and have a defined term of maturity. The term can be anywhere from a year or less to as long as 30 years. With most bonds, investors are paid regular interest of the loan - which can be fixed for the duration of the bond - or the interest rate may increase based on inflation. Investors can buy and sell bonds before their maturity date and, depending on prevailing interest rates, may have a capital gain or loss on the sale.
Equities (Stocks) involve buying shares as a direct investment in a company. The shares may or may not pay dividends, and when sold may result in capital growth or a capital loss for the owner. There are two types of shares: common shares or preferred shares.
Exchange Traded Funds (ETFs) are investment funds that are generally linked to an index that seek to replicate the performance of that particular index. An ETF can hold a variety of assets like stocks or bonds that match the index it is tracking. ETFs have several benefits such as cost effectiveness (including low management fees), real-time transparency into underlying portfolios and investments, and liquidity whenever markets are open. They also provide investors with the ability to add many more investment opportunities and solutions.
Guaranteed Investment Certificates (GICs) are loans where certain elements are guaranteed such as the interest rate you will be earning and the return of your principal investment amount at maturity. Other types such as market-linked GICs pay returns linked to market performance and protect your principal like regular GICs. GIC terms can extend from days to years, and the interest rate will vary depending on the term selected. GICs provide safety and stability, as investors will receive 100 per cent of their principal investment amount back at the end of the term.
Mutual Funds allow investors to pool their money together to buy into a wide variety of investments, from government and corporate bonds, to stocks of large and small corporations. The level of risk will depend on the mutual fund.
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