What Is A GIC (Guaranteed Investment Certificate)?
GICs are investment product (like mutual funds, bonds) that guarantees you to protect your principle (the amount you put in) with a guaranteed income for a particular period of time.
How Do GICs Work?
When you buy GICs, you are lending your money to the financial institution at a fixed or a variable interest rate, or based on a pre-determined formula (or arrangements) for a certain period of time. In return, at the end of the term, financial institution is giving you back the money you originally invested (called principle or capital) plus the interest you earned.
How Many Types Of GICs Are There?
Financial institutions will try to confuse you by giving many fancy names for their GICs. However, there are mainly two types of GICs. The first type pays fixed interest rate, and the second type pays variable interest rate. The second type can be linked to an index, a stock market, or a prime interest rate to pay you variable interest rate. Now let’s look at some other common terms institutions use:
Cashable GICs – You can cash it any times based on the terms provided by financial institutions. This may also be known as Redeemable GICs.
Non-Redeemable GICs – You won’t be able to redeem it until your GIC matures.
Index-Linked GICs – GICs that are linked to stock markets. This may also be known as Market-Linked GICs.
Where Can I Buy GIC?
Various financial institutions sell GICs such as banks, credit unions, discount brokerages, and other financial institutions. Also, your financial advisors are able to sell GICs through the institutions they are affiliated with.
Advantages of GICs
Here are the main advantages of GICs:
Principle Protection: Depending on what you buy, money invested in GICs can be safe and secure. At the end of the term, you will get back your capital you original invested. However, if you have security in your mind, it is recommended that you talk to a qualified financial professional.
Safe Parking: If you are not sure where to invest your money for the long term, you can park your money in short-term GICS while you can search for other options.
Higher Interest: GIC pays higher interest than traditional savings account.
CDIC Protection: Some GICs offered by CDIC insured institutions are protected for up to $100,000. Talk to your financial institutions to investigate this further.
Easy and Simple: GICs are easy to understand and simple to manage. You don’t need to have an MBA to invest your money in GICS.
Disadvantages of GICs
Here are the main disadvantages of GICs:
Liquidity: GICs aren’t very liquid (easy to withdraw) when you need your money
right away. A high interest savings account offers better liquidity than
GICs in most cases. With a GIC, your money is tied up for a specific period of time, i.e.,
one to three years.
Interest Income: If held in a non-registered account, interest earned on a GIC is
is taxed at a higher rate, for example, taxed at your full marginal tax rate.
Don’t Forget Inflation: Let’s say your GIC is giving you 2% interest. And consider that the annual inflation rate is 3%. If you keep $100 in your GIC for one year, you should have $102 in your hands after one year, right? Well, yes, technically, but that $102 is less than you started with. Due to inflation, you need $103 to buy same goods you would have bought with $100 a year ago. So actually, you lost money-$1, to be exact. Yes, real rates of return GICs can be negative or lower than what you actually see.
I am not a fan of GICs. In Invest Now: A Canadian’s Guide to Investing I have discussed how to invest without being a financial guru in non-GIC products such as mutual funds. If the idea of losing money makes you lose sleep and you absolutely can’t take the slightest risks, may be GICS are an option for you. Talk to a qualified financial professional – before making any decisions.
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