Guaranteed Investment Certificates (GICs): How They Work

Looking to invest your money, but don't know where to start? Perhaps you've heard of Guaranteed Investment Certificates (GICs) and want to learn more.

GICs are a safe way to grow your portfolio. The main advantage of GICs is that they provide security because they are insured by the Canadian Deposit Insurance Corporation (CDIC). They also differ in terms of maturity, allowing you to select the ones that best suit your needs and ambitions. 

Continue reading to find out whether a GIC is a good investment for you.

What is a GIC and how does it work? 

GICs are an option to invest your money in a safe, low-risk way with guaranteed returns. With a variety of maturities available, you can pick a GIC that meets your specific investing goals. Furthermore, GICs are CDIC-insured, giving you peace of mind that your assets are secure. 

GICs allow investors to collect interest payments either during the life of the investment or at maturity. Investing in GICs is an accessible alternative that is suited for both new and experienced investors because they require little capital to get started. Furthermore, because of their low volatility, GICs allow you to diversify without taking on much risk, making them a secure complement to your existing portfolio. 

How to choose a GIC

To choose the right GIC, consider the following factors:

1. Financial institution: Start by selecting a trustworthy financial institution that offers GICs, such as banks, credit unions, or trust companies. Look for institutions with strong credit ratings and a good reputation.
2. Investment term: GICs have varying terms, typically ranging from 30 days to 5 years or more. Choose a term that suits your financial goals and the length of time you can afford to lock in your money without needing to access it.
3. Interest rates: Compare interest rates offered by different institutions for the same term. Higher interest rates will yield better returns, but they may also come with more restrictions, such as less flexibility in accessing your funds.
4. Payment frequency: GICs may pay interest annually, semi-annually, quarterly, or monthly. Choose the payment frequency that best aligns with your financial needs and goals.
5. Redemption features: Some GICs are cashable or redeemable before maturity, allowing you to access your funds if necessary. Be aware that cashing in your GIC early may result in penalties or reduced interest payments.
6. Registered vs. non-registered GICs: You can invest in GICs through registered accounts (e.g., RRSPs, TFSAs, etc.) or non-registered accounts. Registered GICs provide tax advantages, while non-registered GICs offer more flexibility in terms of investment options and withdrawal rules.
7. Currency: If you want to diversify your investment portfolio or hedge against currency risk, consider investing in foreign currency GICs.
8. Laddering strategy: To mitigate interest rate risk and maintain liquidity, consider implementing a laddering strategy. This involves investing in multiple GICs with staggered maturities, allowing you to reinvest as each GIC matures at potentially higher interest rates.

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Benefits of GICs

GICs are CDIC-insured, which means your savings are safeguarded in the event of insolvency or bankruptcy. You can select from a variety of terms that best suit your interests and financial goals, while also receiving interest payments during the investment's life or at maturity, allowing for even more customization.

GICs provide investors with a guarantee that their original investment will never depreciate in value, making them an attractive option when looking for a low-risk way to save money (similar to investing with life insurance). Moreover, GICs generate a fixed rate of return. The income generated can be used for your everyday expenses. There are several GIC options available depending on your goal:  whether it is purchasing your dream car, enjoying retirement without worry, or saving for your first home.

GICs can be an excellent method to develop a portfolio with minimal risk and big potential profits. GICs are an excellent choice for people looking to diversify their portfolios without taking on too much risk from higher-yielding assets because they have variable periods and no additional fees. 

Risks of GICs

Here are some risks associated with GICs:

1. Interest rate risk: GICs have fixed interest rates, so if market interest rates increase during your investment term, you may miss out on the opportunity to earn higher returns. Conversely, if you invest in a short-term GIC and interest rates fall, you'll face lower rates when reinvesting your funds upon maturity.
2. Inflation risk: Inflation erodes the purchasing power of your money. If the inflation rate is higher than the interest rate on your GIC, your investment's real returns will be negative, meaning you'll lose purchasing power over time.
3. Liquidity risk: GICs require you to lock in your money for a specific term. If you need to access your funds before the maturity date, you may face penalties or lose the interest you've earned. Some GICs are non-redeemable, which means you cannot access your funds at all before maturity.
4. Opportunity cost: By investing in GICs, you may miss out on potentially higher returns from other investments, such as stocks or bonds. This opportunity cost is a trade-off for the safety and predictability of GIC returns.
5. Credit risk: Although rare, there is a small risk that the financial institution issuing the GIC may default on its obligations. This risk is generally low for well-established banks and credit unions. You can mitigate this risk by choosing institutions with strong credit ratings and staying within deposit insurance limits.
6. Currency risk (for foreign currency GICs): If you invest in a foreign currency GIC, you'll face currency risk due to fluctuations in exchange rates. If the value of the currency you've invested in declines relative to your home currency, you may experience losses when converting the funds back to your home currency.

Despite these risks, GICs remain a popular choice for conservative investors seeking predictable returns and capital preservation. To manage these risks, consider diversifying your investment portfolio, laddering GIC maturities, and consulting with a financial advisor to ensure your investments align with your financial goals and risk tolerance.

Types of GICs Available

There are numerous varieties of GICs to choose from when deciding on the ideal one for you, including:

• Cashable
• Market-linked
• High-yield savings, and 
• fixed-rate GICs

Depending on your investment objectives and risk tolerance, each type offers distinct advantages.

What is Cashable GIC?

A Cashable GIC is an investment that provides both stability and security. It is intended to provide a fixed income for a certain period of time, so you may invest with confidence knowing that your money will not lose value. 

The main advantage of cashable GICs is their flexibility; you can cash them in at any moment without losing your overall return on investment. As a result, they are an excellent choice for more cautious investors seeking consistent returns with minimum risk. 

Keep in mind that interest rates on Cashable GICs are often lower than those on other types of investments, which means you'll need to contribute more initially to generate higher returns.

What is Market-Linked GIC?

A Market-Linked GIC is a type of investment that combines the safety and security of a standard GIC with the possibility of bigger profits based on global equities market performance. This GIC provides a guaranteed minimum return while also allowing you to profit from any market gains that arise. 

The main advantage of a Market-Linked GIC is that it provides a greater opportunity for growth compared to safe investments, making it an appealing alternative for individuals willing to take on a little more risk. Since your returns will vary based on market performance, there is a potential you will lose money if the market performs poorly.

What is a Non-Registered GIC?

Non-Registered GICs are GICs that are not invested in a registered retirement account (like an RRSP). The interest earned from a non-registered GIC is taxable as interest income. 

If you’re looking to save money on interest, they consider investing in a GIC within your RRSP or TFSA account.

What are Registered Retirement Savings Plan (RRSP) eligible GICs

GICs that are RRSP qualifying are a type of GIC that allow investors to save for retirement while earning interest on their investment. They qualify for certain tax breaks and can provide larger returns than other types of investments. Furthermore, RRSP-qualifying GICs offer security and stability, which can help protect your funds from market fluctuations. Investing in RRSP-qualifying GICs is an excellent strategy to increase your retirement savings!

How to buy a GIC

Purchasing a Guaranteed Investment Certificate (GIC) is a straightforward process. Here are the steps you can follow to purchase a GIC:

1. Research and choose a financial institution: Start by selecting a reputable financial institution that offers GICs, such as banks, credit unions, or trust companies. Compare their GIC offerings in terms of interest rates, investment terms, payment frequencies, and other features.
2. Determine your investment amount: Decide how much money you want to invest in a GIC. Keep in mind that the minimum investment amount may vary depending on the financial institution and the specific GIC product.
3. Choose the term and type of GIC: Select an appropriate investment term based on your financial goals and how long you can afford to lock in your money. Choose between registered (e.g., RRSP, TFSA) and non-registered GICs, depending on your investment objectives and tax considerations. If you're looking to diversify, you may also consider foreign currency GICs.
4. Open an account: If you don't already have an account with the chosen financial institution, you'll need to open one. This can typically be done online, over the phone, or in person at a local branch. You may be required to provide identification and other personal information.
5. Purchase the GIC: Once your account is set up, you can purchase the GIC either online, over the phone, or in person at a branch, depending on the financial institution's process. Provide the necessary details, such as the investment amount, term, and type of GIC. Review the GIC agreement and ensure you understand the terms and conditions before proceeding with the purchase.
6. Fund your GIC: Transfer the funds from your existing account to the newly purchased GIC. This can usually be done through electronic funds transfer, writing a cheque, or using a bank draft.
7. Monitor and manage your GIC: Keep track of your GIC's maturity date and interest payments. As the GIC approaches maturity, consider your reinvestment options, such as rolling the funds into a new GIC or investing in other financial products.

Fees Associated With Opening a GIC 

Before you begin, it's important to understand the expenses associated with obtaining a GIC. Several providers charge an administration fee when opening a GIC, although this fee varies based on the amount invested. While these fees are normally fairly low, they should be considered when determining whether or not to invest in a GIC. 

Furthermore, greater costs are associated with GICs that offer higher interest rates or longer durations. Finally, before investing, examine the various options available so that you may make an informed decision on which GIC best meets your needs.

Questions to Ask When Investing in GICs

Investing in Guaranteed Investment Certificates (GICs) is ideal for those seeking to build a stable financial foundation. Make sure to ask what risks are associated with them and what the options for cashing out early include. It’s also important to determine what return on investment you can expect and what type of liquidity, if any, is available should you need access to your funds. 

Furthermore, find out what types of GICs might be suitable for your personal goals and interests. With Dundas Life, you can trust that an experienced advisor will hold your hand throughout the entire process and assure you are making informed decisions that meet your investment objectives.

Are GICs right for you?

Guaranteed Investment Certificates (GICs) can be an excellent and reliable addition to your investment portfolio. They offer low risk and potentially high returns, making them a viable option for short and long-term savings goals. 

When considering investing in GICs, ask yourself some important questions such as how much risk are you willing to take on? What is your desired rate of return? How long do you want your term to be? 

Answering these questions honestly and thoughtfully can help you decide which GIC will best serve your financial objectives. Investing in GICs can help secure a successful financial future. 

So don’t wait any longer - speak with an advisor today to get a walkthrough of the entire process! With their low-risk, high-return investment options and helpful customer service team, there’s no time like the present for obtaining success.