Guaranteed investment certificates (GICs) are one of the safest investments available, and safe is likely what you need right now. Not to mention you'll benefit from higher returns since the prime rate is at a startling 4.7%.
A GIC is a type of investment security that provides – as the name implies – guaranteed returns. No matter the amount of your initial investment, you'll get it back, plus interest. Still, times are tough and locking away your money can feel risky, even when you know that you'll earn a profit. You never know what may come up.
And with high inflation rates and seemingly never-ending prime rate increases, it's natural to wonder whether you should make a GIC investment now or wait to see if the rates will go up even more.
Let's take a look at a few details about GIC investments that might put your mind at ease.
Key Takeaways
- The best time to invest in GICs is when interest rates are high.
- Your risk tolerance and personal goals are the biggest factors to consider when choosing between the 9 types of GICs.
- GIC laddering is a common investment strategy, but you can also try the rollover strategy or simply invest in a high-rate 5-year term.
How to know when you should invest in GICs
The best time to invest in GICs is when interest rates are high. While it may seem like rising interest rates can't possibly be a good thing, considering it makes so many things more expensive, it also means that you can make a better profit when placing your money in a GIC.
And right now, the rates really are up – the prime rate went from 2.45% in March of 2020 to 7.2% in July of 2023. And, of course, individual GIC rates have mirrored this, which means that GIC investments right now are much more lucrative than those made in early 2020.
If you're still hesitant to make the leap towards GIC investing, here are a few questions to ask yourself:
- Do you struggle to save money?
- Are you saving for a specific short term goal? Perhaps saving for a down payment on a home in a few years, saving for wedding, saving to support a child going to college soon, planning to buy a new car in the near future, etc.
- Are you retired and will need access to money fairly soon?
- Do you prefer a balanced portfolio?
- Are you intimidated by the stock market?
- Do you want to teach your kids about investing?
If you've answered "yes" to any of these, a GIC could be the right fit for you. The safety, short terms, and straightforwardness of the investment make it an ideal choice for people mulling these thoughts.
How to choose a GIC
Once you've decided to go for it, you'll want to choose the best GIC investment type that suits your risk tolerance and financial goals. And in order to do that, you'll need to understand the various types of GICs available.
There are 9 basic types of GICs. Here's an overview of what they are and what defines them:
| GIC type | Details |
|---|---|
| Cashable (redeemable) | * Typically have lower rates * 1-year terms are the norm * No penalty fee for early cashout |
| Non-cashable (non-redeemable) | * Initial investment and interest payments are guaranteed * Typically have higher rates than cashable * Unable to access cash until the term ends (or you pay a penalty) |
| Fixed rate | * Have guaranteed rates * Pay at regular intervals or at maturity |
| Variable rate | * Initial investment is still guaranteed * Rate fluctuates throughout the term, based on the prime rate * Higher risk |
| Long term | * Terms range from 1 – 10 years * A longer term usually means a higher rate |
| Short term | * Terms are usually less than 1 year * Rates are lower |
| Registered | * Take advantage of tax benefits offered by your chosen registered account * Can be held in larger registered accounts (RRSP, RESP, TFSA, etc.) * Rules surrounding account contributions still apply |
| Market-linked (equity-linked) | * Linked to stock market performance * Initial deposit is essentially guaranteed * Some banks offer guaranteed interest * Terms between 1 and 5 years (usually) * Accessing funds before maturity incurs penalty fees |
| Foreign currency (U.S. dollar) | * Can be purchased in CAD or a specific foreign currency * Earns interest in a foreign currency * Lower interest than CAD GICs |
Of course, you'll want to choose one of the best rate GICs, but there are other things to consider that can possibly outweigh even this factor. While they don't have the highest rates available right now, Tangerine GICs offer competitive rates – and there's absolutely no minimum deposit required. While others require at least $500 to invest, you can use any amount you like with Tangerine.
You can find more information on these Tangerine GICs here:
Tangerine GICs provide consistently competitive rates. When coupled with the fact that they have no minimum investment amount, this makes this a legitimate investment option for small budgets or nervous investors.
- No minimum investment requirement
The pros and cons of GICs
Another step in the process, before you take the investment plunge, is to consider the pros and cons of GICs – are there any risks with GIC investments that you should be concerned about? And do they outweigh the benefits?
Since risk is always top of mind, here are the downsides to GIC investments:
- Inflation can negatively affect your potential gains. Essentially, this means that if your GIC rate is lower than inflation, you could lose purchasing power over the course of your term. Ratehub's discussion of GIC Risks and Opportunity Costs gives an excellent example scenario to explain this point.
- It's not always a liquid investment option. Non-redeemable GICs in particular don't make it easy to access your money on short notice since you'll pay a penalty for withdrawals made before the term's end.
- There's no assurance that you'll profit from variable rate GICs. Of course, your initial investment is guaranteed, but profit isn't. This isn't a good choice for the risk-averse.
- GICs come with limited protection. If you purchase US GICs or buy from any source besides a major bank or credit union, typical CIDC coverage likely won't be included.
On the other hand, there are quite a few benefits of GIC investments:
- Your money is guaranteed to be returned. You'll see this repeated everywhere, but it truly is the biggest and most obvious benefit associated with GICs. You will get your initial investment back.
- They're easy to understand. GICs are a straightforward, simple investment type that even investor newbies can understand. They offer a convenient way to dip your toe into the world of investing.
- They're easy to manage. Once you've made the initial payment, you don't have to do anything at all until the term is up. It doesn't get easier than that.
- The investment minimum is quite low. While most issuers require a $500 minimum (which is still relatively low), Tangerine doesn't require a minimum of any kind.
- There aren't any fees involved. Unlike other investment securities, there aren't any fees to pay when you invest with GICs, or even when you cash out – unless you withdraw your funds early, of course.
A few GIC investment strategies
If you're looking for a GIC investment strategy, there are 3 main options to choose from: GIC laddering, rollover GICs, and the simple 5-year term route.
- GIC laddering is a process where you "ladder" the terms of your GICs. You take the amount of money you want to invest and divide it up among GICs with different term lengths, such as a 1-year, 2-year, and a 5-year. When each term ends, you reinvest the funds into a new 5-year GIC. If organized correctly, you'll have at least one maturing GIC each year, which means you'll have access to those funds if you need them.
- You can also try the GIC rollover strategy, which has a similar feel to it but is much more straightforward. Investors purchase a 1-year GIC, wait for it to mature, and then roll it over by re-investing in another 1-year GIC. This way, you'll earn more as interest rates rise. But if they fall, you won't lose much since it's a short-term investment.
- As mentioned, the higher the GIC term, the higher the interest rate. But waiting 10 years (or more) for your investment to mature can be frustrating, so a 5-year term is more of a happy medium. This being said, the final GIC investment strategy we'll mention doesn't have a specific name, but is pretty simple: choose a 5-year GIC with a high interest rate and put all your money into it. When it matures, choose another 5-year term with high rates.
How do you feel about GIC investments?
The bottom line is that GIC investments in Canada are almost always safe and at least a little bit profitable. There are still risks and important details to be aware of, but when used correctly, a GIC is a wise choice for nearly all types of investors.
How do you feel about GICs? Do you agree that they're usually safe investments, even during turbulent times? Or would you recommend against them?
We welcome feedback from all of our readers, so feel free to drop us a note in the comments section below.
FAQ
What is a GIC investment?
A GIC is a "guaranteed investment certificate," an investment product with specific term lengths and interest rates. Investors are guaranteed to receive at least their initial investment amount back once the GIC's term ends.
Are GICs a good investment right now?
Yes, this is a good time to invest in GICs since interest rates are high. Fixed-rate GICs will ensure the current interest rate for the entire term, but variable-rate GICs will fluctuate as time goes by.
Are market-linked GICs a good investment?
Thanks to the nature of a GIC, you won't lose any money with a market-linked GIC. However, your returns are based on the performance of the underlying stock or index and, therefore, it's a risky investment choice at any time.
Are GICs a safe investment?
Yes, GICs are almost always safe investments. Depending on term length and interest rates, you may not make a particularly large profit, but you'll always get your initial investment amount back, so you won't lose out.
Leave a comment
Comments