In a time of market uncertainty and volatility, it is natural for many investors to start looking for safer investments. While these safer investments might not provide the same possible return as riskier assets, there is a certain peace of mind that comes with guaranteed investments.
One option that Canadians have when it comes to a safe place to park money is the Guaranteed Investment Certificate (GIC). GICs are often issued through trust companies or banks, and they offer a set return for your money over a period of time. If you are looking to preserve a little capital, or provide a bit of a safety net for your RRSP or TFSA, GICs can help.
What Can You Expect from GICs?
GICs come in different shapes and sizes. It’s possible to get a GIC for a term as short as 30 days, as well as for as long as 10 years. GICs can be registered, as well as non-registered, and can be used in a number of different financial planning strategies. While there are a number of different options when it comes to the amount that you put in the GIC, many require a minimum deposit of $500.
Your rate of return on a GIC varies depending on how long the term is, as well as how much you are putting in the GIC. Interest rates are based on the benchmark set by the Bank of Canada. Generally, the interest rate that you receive when you open the GIC is higher than what you would receive when opening a savings account. This can help you earn a higher yield on your cash, while still protecting the capital. (Your principal is protected, with the risk being a bank or trust company default.)
Understand that you are expected to keep your money in the GIC for the length of the term. You can roll over the GIC into a new Certificate at the end of the term, or cash it out and pay taxes on the interest earnings. If you decide to withdraw money from a GIC prior to the maturity, you might be subject to a fee, and you will lose any interest you might have earned. You might not even receive interest earned up to that point. Make sure that you understand the terms of the GIC before putting your money in one, and make sure that you won’t need the money during the term.
Market Growth GICs
The biggest drawback to GICs is the fact that the returns might be too low to keep pace with inflation — much less beat it. Even though your principal is probably safe, your spending power may not be. One way to modify that state of affairs is to use market growth GICs.
Market growth GICs are sometimes called market stock-indexed GICs. Instead of being related to the cash rate, these are indexed to the rate of growth of a specific stock index. If the index has a market increase, you receive a better return. Of course, if the market does poorly, you don’t receive any interest earnings. The good news, though, is that you never drop below 0%. So you don’t lose money (except through inflation).
As part of a well considered strategy, GICs — regular and market growth — can help you preserve your capital, and even grow some of your wealth.