I have had numerous questions about how one should invest a down payment if one is waiting for the real estate market to go through a correction or if one just needs to save more money before making a purchase.
I have a few thoughts about the subject and the answer largely depends on a person's risk tolerance and time horizon, as with all investments. Here are a couple of scenarios for us to consider:
1) For less than one year until purchase and/or low risk tolerance, this person should not have any equities in the portfolio to be used for the down payment. A money market mutual fund, cashable GIC, high-interest savings account, or short term bond fund would all be suitable selections. The major considerations I would have in this situation are first, liquidity, and second, the highest rate possible over such a short time horizon. Some good money market funds are the TD or RBC Premium Money Market and National Bank Corporate Cash Management funds.
2) For more than one year but less than five years and/or medium risk tolerance, this person should have 20% to 40% of the portfolio in large-cap and dividend paying equities plus a combination of GICs, bonds, and/or bond mutual funds. Some great 'all-in-one' passive solutions would be the TD Income Advantage Portfolio at the more conservative end, or the CI Portfolio Series Income Fund at the more aggressive end. Alternatively, you could buy a cashable GIC or money market fund with 60% to 80% of the money and buy 1 or 2 of the top ten Large Cap Dividend mutual funds in Canada with the rest and for some spice you could add a Global Dividend fund. Most of these funds offer low volatility and great track records.
3) For longer time horizons or for higher risk tolerance, this person could have up to 80% equity depending on the risk tolerance level and the investment opportunities available are very wide and I would just direct you to stay conservative with a focus on Large Cap Dividend investments.
In general, avoiding income taxes on the portfolio should be pursued, and a focus on dividends and capital growth is very advantageous. Some mutual fund companies offer funds that shelter interest income from the full rate of taxation and these funds are widely available through any investment dealer. They are sometimes referred to by a series letter or as a corporate class fund.