Share prices go up and down. Bond prices do the same, but they’re not always as volatile. If you’re not fond of volatility, GICs can be a good alternative.
GIC rates vary depending on the bank and the term you choose. Smaller financial institutions are more likely to offer better rates and the longer the term, the higher the rate will be.
There are many benefits to owning GICs. Here are five:
1. Guaranteed principal and interest
There are a couple of guarantees when you buy and hold a regular GIC until the term ends. First, your principal is guaranteed. If you invest $500, you’ll get your $500 back. If you invest the same amount in the stock market, there’s a chance you’ll have less than $500 or more than $500 in the future. Second, the interest rate doesn’t fluctuate. If you buy a one-year GIC with a rate of 1.5%, you’ll earn 1.5% on your investment.
2. Deposit insurance
Many large financial institutions that issue GICs are also members of the Canada Deposit Insurance Corporation (CDIC). As a result, your principal and interest are guaranteed up to $100,000 in the event your financial institution fails. If you happen to have GICs in a TFSA, an RRSP, and a non-registered account, you have up to $300,000 in protection because each account is considered a separate category by the CDIC. But if you buy GICs purchased from a non-CDIC member institution, you won't have CDIC insurance coverage. However, deposits at credit unions and caisses populaires are covered by non-government insurers or provincial corporations so you’ll still have deposit insurance.
3. Reduce portfolio volatility
Stocks are a volatile investment. If 100% of your portfolio is made up of stocks, you know the value of your investments can rise and fall on a daily basis. To reduce volatility, you can purchase GICs and other fixed-income investments. How does this reduce volatility? Let’s assume you invest $10,000 in the stock market. If the market drops 20%, the value of your portfolio also drops 20%. But if you invest $6,000 in stocks and $4,000 in GICs, the value of your portfolio will drop 12%. Although you’ll still lose money, you won’t lose as much.
4. A variety of GIC options
If you want to lock in your money for a short or long period of time, you can. GICs come with many different term lengths—from as short as 60 days to as long as 10 years. There are generally two types of GICs. Redeemable GICs allow you to withdraw the funds can be cashed in at any time. And there are non-redeemable GICs, which usually don’t allow you to withdraw the amount unless you can demonstrate financial hardship. The good thing about non-redeemable GICs is the rates are much higher than redeemable GICs.
Some financial institutions also offer market-linked GICs, which allow you to participate in a stock market index’s ups but not the downs. You’ll get back the amount you invest if the market declines and some institutions will pay a little bit of interest, but it will be much less than what you’ll get with a regular GIC. While there’s the potential to earn a higher return with a market-linked GIC, there’s also a catch. The return is either capped at a certain percentage or at a specific percentage of the index’s return.
5. RRSP eligible
Want to buy a GIC for your TFSA, RRSP, LIRA, RRIF, or RESP? No problem. GICs are eligible for both registered accounts and non-registered accounts. GICs are flexible and can be used for virtually any savings goal. When looking for the best GIC rate, be sure to shop around.