When GICs Make Sense for Investing

Craig Sebastiano
by Craig Sebastiano January 4, 2018 / No Comments

Let’s face it: GICs aren’t the most exciting investment option. You’ll get all the money back you invested plus a bit of interest. But the return on investment is minimal when interest rates are low like they are now.

However, there are some occasions when buying a GIC is actually a good decision. Here are just a few:

You have a short-term investment horizon

If you want to put your money in a safe place and want to earn a little bit of interest, GICs are a good choice.

For example, if you’re saving for a down payment and plan on buying a home within five years or less, you should consider buying GICs. The money for your down payment will earn interest and your principal is guaranteed. Putting all of the money for your down payment in stocks for a short period of time is risky.

While it’s possible you could end up with a lot more money than what you started with, there’s also the possibility you could lose a good chunk of your savings if the market tanks.

You don’t want to lose any money/take investment risks

A GIC is very safe investment. In fact, you’re guaranteed to get your money back because a GIC is the acronym for guaranteed investment certificate. If you invest $1,000 in a one-year GIC with a rate of 2.5%, you’ll end up with $1,025 when the GIC matures.

But if a rate of 2.5% isn’t good enough and you’re looking for a higher return without the risk, you can look at market-linked (or equity-linked) GICs. These types of GICs offer exposure to the stock market without the risk. One problem is your returns are capped. For example, if the S&P/TSX 60 Index rises 20% in one year, your return on investment might be 10% because you’ll only be entitled to half of the index’s return. But if the market drops, the value of your investment doesn’t decline. However, you might earn a smaller rate of interest than you would with a traditional GIC.

Read: Market-linked Versus Regular GICs

You want a portion of your money in fixed income

GICs and bonds are considered to be types of fixed-income investments. Allocating a portion of your portfolio to fixed income can help reduce risk and volatility. GICs are easy to understand while bonds can sometimes be a little more complicated. You should ideally buy a variety of bonds to reduce your interest rate risk and credit risk. An alternative is to buy a bond mutual fund or a bond exchange-traded fund. Both are diversified and very liquid investments.

You don’t want to be tempted to spend money

If you have a habit of spending money because you know you have money sitting in your account, stashing some cash in a high-interest savings account likely isn’t a good idea. Putting money in a GIC will make it harder to access. A cashable (or redeemable) GIC is easy to cash in so instead consider a non-cashable (or non-redeemable) GIC. The funds in a non-cashable GIC usually can’t be withdrawn before the term ends and you’ll earn a higher rate of interest than a cashable GIC.

The bottom line

GICs can have a place in your investment portfolio, depending on what your savings goals are. If you’re buying a home, they’re a good option. But if you’re trying to save for retirement and you’re young, you might want to consider whether holding GICs makes sense.

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