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Overview: Guaranteed Investment Certificates (GICs)

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.

8 thoughts on “Overview: Guaranteed Investment Certificates (GICs)

  1. Informative post Miranda! The downside to market growth GICs is the fixed term – if the market tanks right before your GIC comes due, you lose any gains regardless of how well the market did prior to that. But you exchange that flexibility for the guarantee of not losing any money. Depending on your risk tolerance, investing directly in index mutual funds may or may not be a better option.

  2. It would be interesting to know how much of a premium they’re charging for these GICs vs. the equivalent government bond (for fixed rate) or at the money call option on the index(for growth).

    If it’s anything like CDs in the US, they’re a terrible deal for everyone but the bank.

    1. GICs usually give about as good as the best interest rate you can get in Canada. Perhaps a bit less, but it is guaranteed. If the markets tank you still get that interest. A nice safety net for a deposit of cash you don’t need for a term.

  3. Good overview. I don’t invest in GICs myself, for the main reason you have already indicated: returns are often too low to keep pace with inflation. Over time, while the principle may be safe, it will lose out to inflation.

    I always keep taxes and inflation top of mind for any investment and all things being equal, in a TFSA, I’d much rather have a basket of dividend paying stocks.

    Other investors I know don’t feel the same, everyone has their own tolerance for risk.

  4. Great Post. I enjoy reading posts that are informative such as this. I’ve never really looked into the GIC although I am aware of them. I’ve always thought the return was too low and similar to simply keeping in the bank. Cheers Mr.CBB

  5. I’m very cautious with my money and after much reading and pondering decided to go the GIC route. In my case I guess I’m lucky in that I have a defined benefits pension to look forward to so maximizing growth isn’t the be all/end all for me. Also, for ethical reasons, the vast majority of stocks are in companies I couldn’t imagine supporting so my options are limited. Recently, I began buying a GIC each month and the rates have been declining. When I started a year ago, they were 3.5%. This month’s was down to 2.85%.

    Utilizing the ladder effect though will help and in the end, I’d rather get consistent and guaranteed compounding.

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