The Tax-Free Savings Account (TFSA) is arguably one of the best investment vehicles that Canadians have since it was introduced in 2009. The account was essentially introduced to encourage better savings habits in Canadians. When making a contribution to the account, you use after-tax dollars in the account. Any returns generated in the account, whether from interest, capital gains, or dividends, grow your account balance without incurring taxes.
Creating an account and funding it is the way to start. Before you start investing in the account, it’s important to understand how to make the most of the account’s tax-sheltered status. The mindset with which you use the account can make a world of difference.
Besides holding dividend stocks for long-term wealth generation, focusing on growth-centric investments and diversifying are the key steps to making the account a successful investment tool.
Injecting growth
Since the capital gains on your investments held in the account do not incur taxes, putting in assets for the long run that can offer such gains simply makes sense. To this end, I would recommend going for a high-quality blue-chip Canadian growth stock. One of my favourite picks for this purpose would be Shopify Inc. (TSX:SHOP).
Shopify has been a massive success story. The company went public in 2015, offering an ecommerce platform that lets merchants of all sizes create an online presence. The platform lets them set up everything, including digital storefronts, fulfillment, payment, and shipping services.
Its AI-powered tools make the shopping experience better for end consumers and offer improved chances of success to merchants. In turn, Shopify benefits itself and its investors. As of this writing, Shopify stock trades for $187.03 per share, up by 5,259% over roughly a decade of trading on the stock market.
However, a closer look at the price chart will show you plenty of volatility in the share prices. This brings me to my second point.
Diversification matters
They say that you should never put all your eggs in one basket. That’s what I believe when investing in the stock market as well. If you rely on just one asset for returns, it can be too risky. If Shopify undergoes another massive downturn, it can wipe out a lot of your gains with no clear timeline for recovery. Diversifying can help you offset losses from one asset by making it up with gains from others.
The best way to diversify in a TFSA without worrying about managing several different assets is investing in Exchange-Traded Funds (ETFs). ETFs are essentially single-ticket investments that let you invest in a group of companies at the same time. It’s the same as investing in stocks, but you get exposure to multiple assets with one fund.
If you’re looking for a growth-focused fund, I’d recommend the iShares Canadian Growth Index ETF (TSX:XCG). XCG is a growth-oriented fund with a strategy that’s been proven successful. The fund aims to achieve long-term capital growth by investing in large and mid-sized Canadian companies that expect earnings to grow faster than the rest of the market.
The fund holds over $110 million in assets that are distributed across 35 companies, including Shopify. By offering exposure to multiple sectors, it offers protection against pullbacks in certain sectors of the economy. In turn, it also delivers growth with an improvement in the performance of the stocks in the fund. The fund charges a Management Expense Ratio (MER) for providing fund management for you. For XCG, the MER is a meager 0.55%, making it quite affordable.
Foolish takeaway
Investors who want to gain an extra edge without taking on too much risk can consider allocating some of the contribution room to ETFs like XCG. As you gain more experience as an investor, you can start being more aggressive with growth stocks and invest in individual stocks as well.
