Guaranteed investment certificates (GICs) or term deposits are a solid fit for anyone looking for a secure investment with no unforeseen risks. GICs are one of the safest approaches to investing.
When you invest in a guaranteed investment certificate or term deposit, you essentially lend your funds to a financial institution for a set deposit term. Typically, the longer the term, the higher the return rates you receive. The primary benefits of a guaranteed investment certificate are guaranteed returns with fixed rates and full protection of your principal investment.
Let’s learn more about guaranteed investment certificates, their benefits, the risks, and ways you can start investing in one today.
What Is a GIC?
A guaranteed investment certificate, or GIC, is an investment product that ensures you earn a guaranteed interest rate on the funds you lend to a financial institution. They can be your go-to when deposit rates and economic instability are on the rise or if you’re more comfortable with a low-risk investment..
Your term length and when you need access to your money determines the type of GIC you’ll choose. You can withdraw from redeemable GICs or term deposits at any time, but your interest rate will tend to be lower than with a non-redeemable GIC. If you choose a non-redeemable option, typically ranging from a 1 to 5-year term, your money is locked in but at a higher rate than with a redeemable option.
If interest rates are increasing, a bank or a credit union may offer you higher rates, provided you agree to keep your funds locked-in for longer. That is, a five-year term deposit typically grants more favorable returns than a three-year alternative.
Most Canadians use GICs as part of their savings strategy. With guaranteed moderate rates of return, GICs have become a trusted investment option widely accessible across Canadian banks and credit unions.
How Does a GIC Work?
The way the GIC works is rather straightforward: you lend money to a bank or a credit union and earn interest per negotiated terms. Before investing in GICs or term deposits, consider the common terms likely to be included in your contract:
Investment amount. The minimum investment amount is $1,000. Though there’s no cap to the maximum amount eligible for the deposit, the Canada Deposit Insurance Corporation (CDIC) insures only up to $100,000 of your total deposits per account.
Interest rate. While the starting rate may be influenced by prime, once you invest, your rate is locked in for the full term and does not change. Interest rates will also likely be higher if you agree to keep your funds locked-in longer.
Deposit length. The period for which your money stays in the account can vary. Please note that the deposited funds should stay in your deposit account for the negotiated term.
Maturity date. It’s the point of your investment where you stop receiving interest payments. Upon reaching the maturity date, you can reinvest your funds or take them out by instructing your financial institution beforehand.
Please keep in mind that failure to inform your bank or credit union ahead of time means the financial institution might reinvest your funds in the same GIC type and term length after the maturity date. You’ll usually have up to 15 days to cancel the renewed term.
What Are the Different Types of GICs?
GICs come in various forms. Below are GIC options you can choose from to meet your financial goals.
Fixed-rate GICs. These are the most common types of GICs. A fixed-rate option offers you a set interest rate for the length of your investment term.
Registered GICs. This option allows you to grow your savings tax-free with an RRSP or a TFSA. This option is registered with the Canadian federal government and allows you to not pay taxes earned on your GIC. It can become a great addition to your regular savings account.
What Are the Different GIC Terms You Should Know?
The primary factor differentiating your GIC is the deposit length. You may prefer that your funds are easily accessible. Or maybe, high returns on your initial investment are non-negotiable. So, it’s critical to understand the differences between GIC terms:
Short-term guaranteed investment certificate. Short-term GICs are negotiated for a deposit term of one year. While rates vary across different financial institutions, in most cases, the longer the deposit length, the higher the interest rates.
Long-term guaranteed investment certificate. This option involves a longer commitment. With long-term GICs, you agree to lend your funds to a bank or a credit union for more than a year.
Laddered GICs. With a laddered approach, you can maximize your GIC returns by dividing the total investment into five portions. Invest each portion in GICs with different terms: 1-year, 2-year, 3-year, 4-year, and 5-year. As each GIC matures, reinvest the funds into a 5-year term to ensure the highest returns and access to your money over time.
Convertible GICs. This is a 3-year option that allows you to take advantage of potential rate increases. You can convert your current GIC into a higher rate GIC once during your term. The new GIC must be a non-redeemable investment equal to or greater than the remaining investment length.
The Benefits of a GIC
GICs could be a perfect fit for those seeking a safe investment option with lower risk exposure. The chief advantages of adding GICs to your investment plan are:
Security. Your principal remains unaffected by market fluctuations. This means that your initial investment won’t be affected even if the market drops.
Range of options. You can choose different GIC types based on your savings goals.
Simple estimation of interest returns. Because your interest rate is fixed, estimating your returns is fairly straightforward.
Tax-free gains. With registered GICs, you won’t be taxed on the interest your savings earn.
Risks of a GIC
While there are a lot of benefits to GICs, it’s important to acknowledge the potential risks associated with this investment tool.
While GICs provide protection from market fluctuations, their low-to-medium interest returns might not keep up with inflation. For example, if this investment option provides 3% annual interest over a 5-year deposit term — a period when inflation averages 6% — you would lose money in the long term.
Additionally, if you choose a non-redeemable GIC, your funds will be locked in for the entire term, meaning you won’t be able to access them unless you qualify under specific circumstances, such as proven financial hardship.
How Do You Choose a GIC?
Choosing the right investment strategy means maximizing the probability of your money working in your favor. Consider the following when selecting your GIC:
Decide what term suits your investing strategy. Start by determining the deposit length that best suits your needs.
Decide whether you’re interested in laddering your GICs. You can purchase individual GICs with different maturity dates. Putting your money into accounts with different maturity dates means you can reap the benefits of earning at a higher interest rate with your long-term investments, plus accessing funds when you need them as your short-term GIC terms end.
How Much Are GIC Fees?
You can invest in GICs without any charges. However, you might be penalized for withdrawing the funds before the negotiated maturity date. For this reason, it’s essential to consider the terms and conditions offered at your financial institution before buying these investment products.
If you’re likely to need your funds early, a redeemable GIC would be the best choice. This option allows you to withdraw your cash earlier without penalties.
Conclusion
A guaranteed investment certificate is a straightforward and safe option to diversify your investment strategy. Issued by Canadian financial institutions, GICs offer a trusted approach to enhancing your savings. And with a registered GIC, you can shield the interest you earn from taxes.
With so many GIC options to choose from, you can find the one that matches your financial needs. Whether you’re looking for accessibility or higher returns, this secure investment has something to offer everyone.