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 (Canada 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
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.
Interested in investing in GICs?
Log onto Scotia OnLine®, go to “Quotes & Research” and click on “Fixed Income/GICs”. There you will find all the investing ideas on GICs.
Not a Scotia iTRADE client? Open an account today.
This publication has been prepared by Scotia Capital Inc. (“Scotia iTRADE”) and is intended as a general source of information and for educational purposes only and should not be considered as personal and/or specific financial, tax, pension, legal or investment advice. This publication does not take into account the specific personal, financial, legal or tax situation or particular needs of any specific person. No information contained in this publication constitutes a recommendation by Scotia iTRADE to buy, hold or sell any security, financial product or instrument discussed therein. The information contained in this publication neither is nor should be construed as an offer or a solicitation of an offer by Scotia iTRADE to buy or sell securities or to follow any particular investment strategy. Scotia iTRADE does not make any determination of your general investment needs and objectives, or provide advice or recommendations regarding the purchase or sale of any security, financial, legal, tax or accounting advice, or advice regarding the suitability or profitability of any particular investment or investment strategy. You will not solicit any such advice from Scotia iTRADE and in making investment decisions you will consult with and rely upon your own advisors regarding the appropriateness of implementing strategies before taking any action based upon the information contained in this publication. Opinions and projections contained in this publication are our own as of the date hereof and are subject to change without notice. While care and attention has been taken to ensure the accuracy and reliability of the material in this publication, neither Scotia iTRADE nor any of its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of such material and disclaim any liability resulting from any direct or consequential loss arising from any use of this publication or the information contained herein. This publication and all the information, opinions and conclusions contained herein are protected by copyright. This publication may not be reproduced in whole or in part without the prior express consent of Scotia iTRADE.