Canadians are voluntarily putting billions of dollars into financial investment “prisons” – where the money is locked in for years, without much flexibility! There are other good alternatives available for investors; however, most people simply don’t know enough about these financial traps.
Here are three examples of financial prisons that you should avoid:
1) The mutual fund deferred sales charge (DSC)
What is the advantage of having to hold money in a fund family for seven or eight years for fear of a financial penalty? Why buy a DSC version of a mutual fund when there is usually a no-load fund available that is probably just as good? At the Investor’s Group Dividend Fund, if you want to take your money out as cash in the first year, there is a 5.5% penalty! You have to invest for seven years before the penalty decreases to zero.
As an alternative, you could buy the RBC Dividend fund or a similar fund, with no load and a five-year return that is 2-per-cent better than the Investors Group fund – and best of all, no penalties for not “locking in” your money.
2) RESP scholarship funds
If a seven-year sentence sounds long, how about 18 years? That is what you are voluntarily doing when you set up an RESP using a scholarship plan. These plans can be beneficial, but only if you are willing to do the time, meaning that you are committed to a payment every year (often for 18 years). If you want to leave the plan, you face significant penalties.
A better alternative is any other type of RESP plan, where once you open an account, you can choose to contribute or not, can choose what to invest in, and have real control over your money. This can be set up at any bank or brokerage firm.
3) Five-year GICs
At one time, low market risk was the appeal for investors “locking up” their funds for five years. In today’s world, the rates are simply not worth it. Accord to the CIBC website, you can get 2.1% in a five-year GIC. High interest savings accounts like People’s Trust offer the same 2.1% interest, but you can take your money out at any time. You are better off with this type of alternative.
Just remember: as an investor, you have many options when it comes to choosing where to put your money. Make the flexibility of your funds a top priority when choosing your investments, and you can successfully avoid “investment traps” such as these ones.
If you liked this article, read about another type of investment to avoid: the guaranteed retirement income plans.