What are Guaranteed Investment Certificates?
November 6, 2019. Guaranteed investment certificates (GICs) are one of the safest kinds of investments. Buy buying a GIC, you lend the financial institution your money for a set term and earn interest on it. The longer the term, the higher the interest. You GIC is protected by the Canada Deposit Insurance Corporation (unless it is in US dollars or the term is over 5 years) and at the end of the term, you are guaranteed to get your money back.
GIC facts:
- It is possible to have your GIC in a registered investment account like a TFSA, RRSP, or RRIF.
- GICs earn a fixed interest rate for the duration of the term, which can be up to 10 years.
- You will often pay a penalty to get your money back before the term is over but some GICs do not charge a fee for getting your money back early.
- It is possible to have a variable interest rate, which is based on how well a benchmark like a stock exchange index does.
- Your interest is paid every few months, annually, or on the maturity date.
Types of GICs
Non-redeemable
Regular GICs do not allow you to withdraw funds before the maturity date without paying a penalty. They have a fixed interest rate.
Cashable
Cashable GICs allow you to take out money any time after 30 days and have a fixed interest rate.
Market-linked
Market-linked GICs have a variable interest rate that depends on the stock market while still guaranteeing that your principle investment will be returned.
- Interest rates of index-powered GICs depend on the performance of an index.
- Interest rates for equity-powered GICs are linked to a basket of stocks and depend on their performance.
Advantages of investing in GICs
- GICS are low-risk investments and you are guaranteed to get your money back. They will give you a consistent return.
- Having low-risk investments like GICs helps balance out riskier investments in your portfolio.
- A market-linked GIC offers the potential for a higher return while still maintaining the security of a GIC.
- You can choose a term from a few months to several years and you can space out the maturity dates.
- You can stagger the maturity dates on multiple GICs so you can get some of your investment back sooner while still earning the higher interest rates of the longer term GICs. This is called laddering.
- If your GIC is in an RRSP or other tax-sheltered savings account, you do not need to report income from your interest.
- GICs are easy to understand.
Disadvantages of investing in GICs
- Although the interest rate is higher than that of a savings account, the rate of return is low compared to other types of investments.
- Most GICs do not allow you to withdraw money without penalty if you need it in an emergency.
- If your GIC is not held in a tax-sheltered savings account, such as an RRSP, you will get a lower after-tax return.
Should you invest in GICs?
If you are looking for a safe investment or would like to balance your high-risk portfolio, a GIC could be right for you. You could even use it instead of a savings account to earn more interest when saving for a specific goal like a down payment on a house.
