What Is a GIC?

by Jordan Lavin November 2, 2017 / No Comments

In Canada, one of the safest and most reliable investment options available is the GIC. You might have heard about them through advertising, been offered a GIC from a salesperson at the bank, or read about them here on Ratehub.ca. They’re one of the most common and easily accessible investments we have. But what is a GIC?

A GIC (short for guaranteed investment certificate) is a simple and cost-free way to grow your money. When you invest in a GIC, you commit to keeping your money in the GIC for a set period of time, after which your money will be returned to you along with any interest you’ve earned.

Let’s dive into how a GIC works.

The first decision to make when investing in GIC is how long you want to invest your money for. This is known as the GIC term. Terms are available in lengths as short as 30 days and often as long as five years (and sometimes even longer).

Usually, the longer you lock in your investment for, the higher your GIC rate (the amount of interest paid to you) will be. You’re rewarded for committing to a longer term. For example, at the time of writing the best one-year GIC rate in Canada is 2.25% and the best five-year GIC rate in Canada is 2.75%.

The “guaranteed” part of GIC refers to the fact that there are no surprises or unknowns when it comes to GICs. When you invest in a GIC, you’re not subjected to the ups and downs that come with other investments. From the time you deposit your money, you know exactly how much your investment will be worth when your term ends.

Read: 5 Benefits of GICs

For example, let’s say you invest $1,000 in a one-year GIC at a rate of 2.25%. You’ll earn interest of $22.50. When your term ends, your investment will be worth exactly $1,022.50. Regardless of what happens in the markets, there’s no chance you’ll lose money or be paid less interest.

The only time when you might not earn the full amount on your investment is if you cash out early. This depends on the GIC provider (the financial institution you get your GIC from). Some providers will let you cash out early and pay the full amount of interest you’ve earned up until that point. Others will pay a reduced amount of interest when you cash out early. Some will return your initial investment with no interest at all. And others won’t let you take out your money early under any circumstances.

Aside from these potential early withdrawal penalties, there aren’t any fees associated with investing in GICs. You can invest in GICs at any Canadian financial institution, even if you’re not a regular customer. In fact, some smaller banks and credit unions offer very competitive GIC rates that could be more than double what your regular bank pays. That’s why it’s important to compare GIC rates and find the best rate for your desired term. When it comes to GICs, features are pretty much the same at every bank. So there’s no advantage to selecting any provider other than the one offering the best GIC rate.

That said, there are a few differing GIC features you might find at different financial institutions, although they’re usually small details. Examples of these include early redemption rules (as discussed above), the minimum investment (typically ranging from $500 to $1,000 but sometimes higher), and purchase methods (such as whether you can buy the GIC directly from the bank or through a discount broker).

Another feature you’ll find only at some financial institutions is insurance offered by the Canadian Deposit Insurance Corporation (CDIC). This insurance protects the money you deposit up to $100,000 (principal and interest combined) in case the financial institution fails. Because CDIC insurance is backed by the federal government, it’s virtually impossible for your money to be lost. Most credit unions don’t have CDIC insurance, but all Canadian financial institutions have some kind of deposit insurance.

Read: Should I Get a GIC With a Bank or Credit Union?

Finally, there are a few different types of GICs you can choose to invest in. In addition to regular GICs, you can also open GICs inside of registered accounts like RRSPs and TFSAs. There are separate rules governing these tax-sheltered accounts, but you can save significantly on taxes through their use.

You can also invest in U.S.-dollar GICs through Canadian financial institutions. They work the same way as Canadian-dollar GICs do. But because the interest and principal are returned to you in U.S. dollars upon maturity, there’s a risk that your investment could be worth less in Canadian dollars because of fluctuating currency values.

Market-linked GICs are also available. These GICs typically pay a variable rate of interest depending on how certain market indices perform. However, you’re unlikely to earn as much as you will by investing in the market directly. Most advisors will tell you to consider mutual funds or low-cost exchange-traded funds (ETFs) instead.

There are lots of great ways to use GICs to grow your savings. GICs are perfect when you have a specific, time-sensitive savings goal in mind. They’re also a good way to ensure you keep your hands off your money if you tend to spend your savings.

That said, a GIC isn’t a savings account. Once the money is deposited, it’s locked in. If you need access to your cash, a high-interest savings account is a much better way to save.

It should also be noted that GICs aren’t a good way to invest the majority of your money in a low-interest rate environment. Even though there’s no risk of losing money, GIC rates closely follow inflation. That means no matter how long you invest in a GIC for, your money will buy roughly the same goods and services after your investment matures as it would before.

GICs are a great way to protect a portion of your money while you put the rest in higher-paying investment vehicles. But if you’re looking for a simple, cost-free way to grow your savings, a GIC can be the way to go.

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