A guaranteed investment certificate (GIC) is an investment product that guarantees you a specified rate of return for lending a bank or similar institution your money for a specific period of time. It works the same way as a loan, except that the lending institution pays you interest.
Frequently asked questions
GICs do not offer the same potential for high reward as investing in the market and other securities. However, they also do not have the same high risk. GICs are valu-able if preserving your principal is essential to you, but you want to earn something on your money. For example, you may not want to risk the money you’re saving on a new car or for a child’s education or your retirement, particularly if these goals are in your near future. You won’t have the time to make up for any losses you might suffer in other equities, and GICs will offer you a safe place to invest your money with some return on your investment without risking the principal.
Your principal is usually safe in a GIC investment. However, that does not mean GICs are entirely risk-free. With a term deposit, there is the possibility that your investment will lose real value if the inflation rate rises higher than your rate of return. There is also a risk that you will not make any return on investment in a GIC tied to the market or invested in a foreign currency (if the market fails to perform well or the currency you invested in underperforms compared to the Canadian dollar). Finally, there is a risk to your principal if you do not buy GICs from a financial institution that is a member of the CIDC, and that institution fails.
GICs are generally available throughout the year, so there is no specific time to buy them. However, there are times when a GIC can be the best investment. GICs are great for helping you balance risk in your portfolio and are safe places to store cash while you wait for other investment opportunities. When the stock market is exceptionally volatile, you may also want to put your money in a relatively safe place, such as a GIC.
If you are retiring soon or sending a child off to college or university in the next few years, GICs are a sensible investment. They are also a great way to save for significant events or purchases such as weddings, trips, automobiles, or even appliances. GICs offer a better rate of return than a simple savings account for these types of purchases, and they incentivize you to save by penalizing you if you take your money out.