What is a GIC?
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.
GICs are also like a savings account, except that in exchange for a higher interest rate on your deposit, you agree to leave the money in place and not withdraw it. If you cash out early, you may have to pay a penalty or lose some of what you earned.
The longer the term of a GIC, the higher the interest rate you earn. It is called a Guaranteed Income Certificate because, unlike other securities, it offers a guaranteed principal, meaning your principal (the amount you initially put in) is never at risk. With most GICs, you also receive a guaranteed return on your investment.
A GIC is a safe and secure investment with minimal risk attached to it. However, these types of investments tend to have historically lower rates of return than other higher-risk equity investments. This is especially true when general interest rates are lower.
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Types of GICs
GICs offer varying terms. GIC terms can be as little as 30 days or as long as 10 years. The institution where you buy your GIC can pay you interest on a monthly, semi-annual or annual basis or reinvest the interest on your behalf until the maturity date.
Non-redeemable GICs will not allow you to access your funds until the end of the term. If you think you will need the cash, look for a cashable or redeemable GIC. Cashable GICs often have a one-year term and can be cashed at any time after a short waiting period of 60-90 days without penalty. Redeemable GICs are often held for longer than one year and can be cashed at any time, although there is of-ten an early redemption fee.
GICs also come in various forms, including fixed income investments and others tied to the stock market.
Fixed Rate GICs
Fixed rate GICs offer a predetermined interest rate. The upside of a fixed rate GIC is that you are guaranteed a specific and predictable rate of return. The downside is you are not protected against inflation. For example, if you buy a $1000 GIC at a fixed rate of 2%, you will earn $20. If the inflation rate hits 4%, you will have $1020, but your original $1000 will be worth $40 less. You have effectively lost $20 in real value.
Variable-rate GICs are tied to the bank’s prime rate. If the prime rate rises, your rate of return rises too. If they drop, however, your rate of return will as well.
Equity-linked GICs link to a stock market index. You will not know your rate of return until they reach maturity. If the stock market performs well over the term of your GIC, you could receive a reasonable rate of return. However, if the stock market under-performs, you could see nothing other than the return of your original principal.
Escalating rate GICs
Escalating rate GICs pay you increasing interest rates over the term of the invest-ment. For example, with a three-year term GIC, you receive a higher rate in year two and an even higher rate in year three. The idea is to incentivize you to keep your money invested in the GIC and not take it out early.
US and Foreign Currency GICs
You can hedge your investment against currency fluctuations by investing in a US or foreign currency GIC. This is a good idea if you think that the Canadian dollar may lose value compared other currencies.
Many insurance companies offer these GICs, othwerwise known as accumulation annuities. These types of GICs allow you to name a beneficiary. The CIDC does not insure them, and they have slightly different terms and conditions.
GICs can be held in Registered Education Savings Plans (RESP), Registered Re-tirement Savings Accounts (RRSP) and Tax-Free Savings Accounts (TFSA). This a tax-friendly investment, as the tax-free status of a registered account also offers pro-tection for the returns on your GIC.
Why invest in a GIC?
GICs are excellent low-risk investments. They make sense for people with shorter investment horizons and those who cannot afford to risk their principal. That’s why they are generally good choices for registered accounts such as RESPs and RRSPs, particularly if people will soon need these funds for significant events or purchases such as weddings, trips, automobiles or even appliances. Or to send a child to school or retire.
GICs are also great to help save money for a long or short term goal. Unlike a savings accounts, GIC rates are guaranteed, and there are incentives to leave your money in the GIC. In theory, you are more likely to keep saving.
Buying a GIC: How and Where
You can buy GICs in person, by phone or online, directly through most financial institutions, including banks and trust companies. Independent deposit brokers or online discount brokerages also sell GICs. You will need to set up an account, sign forms and arrange a deposit to pay for the GIC.
The best GIC rates
Rates for GICs vary widely depending on the seller and the terms. Cashable or redeemable GICs tend to have lower rates than non-redeemable GICs. Longer terms or escalating GICs offering higher rates than short term GICs. Credit unions often provide some of the best rates, but many of those are not covered by CIDC insurance. Be sure to ask about terms & conditions as well as insurance.
Here is a short list of some of the best regsitered, CDIC insured GIC rates in Canada:
GIC Pros & Cons
Pros: The Good Stuff
Good return (GICs currently offer between 1-3% interest)
Easy to manage
No fees for purchasing and cashing
Insured investment (if purchased through a major institution such as the Canada Deposit Insurance Corporation (CIDC)
Protection from volatility (if you opt for a fixed interest rate GIC)
Minimal initial investment (you can buy a GIC for as little as $100)
Cons: The Not So Good Stuff
Lower overall returns
No protection from inflation
Reduced after-tax return (unless held in registered accounts)
What are insured GICs?
If you purchase a GIC through a major institution, it is insured up to $100,000 with the Canada Deposit Insurance Corporation (CIDC). Certain GIC deposits made with credit unions and caisse populaires are insured by Provinces. This means that if something happens to the bank, your deposit is still protected. These include:
However, foreign currency GICs, those with terms longer than seven years or sold by a financial institution that is not a member of the CIDC and/ or provincial deposit insurance, are not insured.
Our Final Thoughts
Take time to compare rates and terms before you buy. Understand your own needs first. What are you saving for, and when are you likely going to need access to the cash? Can you foresee any emergencies where you may need the money sooner? These questions can help you determine the term and type of GIC you buy and get you the best return on your investment while still ensuring your money is available to you when you need it.
GICs are safe, secure investments that allow you to earn a competitive rate of return on your investment. Investing in other securities can offer a much higher rate of return. However, GICs are still an excellent choice for risk-averse investors and short-term investors or those seeking to balance risk in their investment portfolios.
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 in-vestment 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 excep-tionally 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 signifi-cant 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.