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A guide to help you understand how GICs work

GICs for beginners

With interest rates close to historic lows, many investors are seeking out alternatives to government bonds and savings accounts, which are struggling to deliver attractive yields.

One such alternative is a guaranteed investment certificate, or GIC. This is popular among some investors who want a safe option that will deliver somewhat higher interest returns.

So what is a GIC?

A guaranteed investment certificate is a savings product that is effectively a loan you make to a financial institution. You receive a guaranteed rate of interest, but your money is typically locked into the account for a pre-determined amount of time. Typically (but not always) the longer the GIC’s term, the higher the interest you’ll receive.

Interest can be paid out either monthly, quarterly, annually or at maturity. At the end of the term, you are paid back your full principal, plus any interest still owing. If you withdraw your money early, you might have to pay a penalty. For this reason, you wouldn’t want to use a GIC for any money you might need to access in a hurry.

Are GICs safe?

GICs are very safe investments (this is a key reason why they’re popular). Your principal (and often the interest) is usually guaranteed, typically by the Canada Deposit Insurance Corporation, though the insurer can change depending on who you take the investment with and which province you live in.

Amounts up to between $100,000 and $250,000 are covered, depending on your home province. Even if your financial institution were to go bust, your money would be safe.

Are GICs liquid?

On the whole, most GICs are not considered to be liquid assets because, by their nature, they lock your money in for a specified period of time. There are several different types of GICs, however, and some are more liquid than others:

Non-redeemable GICs—These products only work if you are OK with locking up your money for set periods of time. If you are allowed to withdraw your money early from these types of GICs, you will be charged a penalty. As a result, interest rates are higher than redeemable GICs.

Redeemable GICs (or cashable GICs)—These are a good bet if you think you might need to withdraw your money before the end of the term, as they don’t charge a penalty. However, their rates are not as high as non-redeemable GICs.

Market-linked or equity-linked GICs—These are linked to the performance of an underlying stock market index, so the return is not guaranteed, and you only know what it will be when it matures. This can be a good way to take advantage of the growth potential of the stock market without as much of the risk: you might make no interest if the stock market drops in value, but you will always keep your principal.

GICs versus mutual funds and bonds

Many investors wonder how GICs compare to mutual funds and bonds. When it comes to mutual funds, GICs have a very different purpose. Mutual funds invest in a variety of assets, some of which can be riskier from the point of view of losing value. They also have the potential to deliver much higher returns than GICs. GICs are designed for investors looking for a very safe investment with returns delivered over a defined time period.

When comparing GICs to bonds, both investments are relatively safe but typically provide considerably lower returns than equities usually deliver. Some GICs currently deliver higher interest rates than many North American bonds, so they may be a better option for some investors. Bonds that have the potential to deliver higher rates will typically carry more risk.

Pros and cons of GICs

What is a GIC’s strength? What is a GIC’s drawback? Let’s take a look:

GIC advantages:

• Your principal is typically guaranteed, up to the insured limits, so you normally won’t lose it (and interest is usually guaranteed as well)

• Being unable to access your money without a penalty can help prevent you from dipping into your savings

• There is a wide variety of GIC rates and terms to choose from

• They can be held within registered accounts (such as RRSPs and TFSAs)

• Interest can be considerably higher than with regular savings accounts

• GIC rates can also be higher than government-issued bonds

• It is a very safe investment

• There are usually no charges to open a GIC

• Minimum investments are often as low as $500

GIC disadvantages:

• Interest rates can be fairly low, depending on the market, so if you’re investing at a time when rates have dipped, try not to lock your money in for too long

• The best GIC rates in Canada require your money to be locked in for several years at a time

• If you withdraw your money early, you will probably pay a penalty

• Locking in your money for a long period at a low rate during a time of high inflation could effectively mean your money loses value

Are GICs a good investment?

This will really depend on your individual situation and financial goals. A qualified financial planning professional can discuss if guaranteed investment certificates are a good option for your portfolio, go over the best GIC rates in Canada and suggest which ones might be the best fit for you.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and took over as board chairman in 2019. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected]

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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