Understanding Guaranteed Investment Certificates (GICs)
A safe and secure way to invest.
Looking for a low risk investment to add to your portfolio? You could invest in GICs (Guaranteed Investment Certificates). A staple of many Canadian portfolios, GICs provide stable and insured returns with little risk to the principal investment.
What are the benefits?
Safety, safety, safety – your original investment and any interest earned are 100% guaranteed.
Not greatly affected by market fluctuations.
Interest rates are guaranteed over a predefined period of time.
Eligible for your RRSP, RRIF, RESP and TFSA.
Simple to understand.
A range of term and interest rate options enable to customize to your goals.
GICs with terms to maturity are eligible to be insured by CDIC (Canadian Deposit Insurance Corporation).
Disadvantages of Investing in GIC’s
Most GICs do not offer a great deal of liquidity in the event of an emergency.
Although superior to chequing and savings accounts, GICs still offer a relatively low rate of return.
After-tax return is lower if held outside of an RRSP.
People don't like to lose money and that’s why guaranteed investment certificates are popular. But if you want your money to grow over the long run, there is no substitute for the long-term returns stocks or bonds can generate. GIC investors can be seen as trading off near term gain (no volatility in the short-term) for long term gain (high probability of purchasing power loss).
Are GICs right for you?
Every investment carries a component of risk and reward. Generally speaking, the higher the risk of an investment, the higher the potential return.
That’s important to keep in mind when considering GICs. While they offer you a lower risk profile than options like stocks, bonds or mutual funds, the return is also lower. So, if you’re searching for investments with higher potential upside, GICs may not be for you.
Different Types of Guaranteed Investment Certificates (GICs)
You have plenty of choices when it comes to GICs. In addition to ‘regular’ GICs, there is a growing range of modified GIC products which offer more flexible interest and term renewal options, but also carry an added element of risk:
Cashable and non-redeemable GICs
With a regular or non-redeemable GIC, you’re locked into the investment for the duration of the term. If you need to access your funds before the date of maturity, you may be charged an early withdrawal fee.
Unlike non-redeemable GICs, cashable GICs give you the option to withdraw funds anytime after 30 days without penalty. Cashable GICs are usually issued at a fixed interest rate, but provide a more liquid option for investors.
Market-linked GICs differ from cashable or non-redeemable GICs by providing a variable rather than fixed interest rate. The rate is dictated by the performance of the stock market. This offers you the potential for higher returns while enjoying full protection of your principal investment. Generally, there are two types of market-linked GICs:
Equity-powered GICs are linked to the performance of a basket of stocks.
Index-powered GICs are linked to the performance of an index, such as the S&P/TSX.
You’ll find that most market-linked GICs offer a guaranteed yearly interest rate to help hedge against declining markets, but the rate is generally much lower than that of regular GICs.
Similarly, these type of GICs could also carry a higher potential rate of return than regular GICs should the markets go dramatically up. This rate is typically higher than a regular GIC and is primarily used to manage the risk to the issuer. Investors should fully understand the risks and impacts of market volatility and inflation when planning to invest in market-linked GICs.
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