A Guaranteed Investment Certificate (GIC) is a type of investment in which the investor agrees to lend money to a financial institution for a set amount of time. Time periods (dates of maturity) for GICs vary from increments as little as one month or up to ten years.
Also available are index or market-linked GICs, whose interest earnings depend on stock market conditions, while offering protection of your principal investment.
What are the costs of owning a GIC?
GICs usually have no administrative fees associated with them. However, a penalty may be charged if money is taken out of the investment before reaching the date of maturity. Redeemable GICs carry no penalty for early redemption, but the interest rate may be lower. There may be a minimum deposit required to purchase a GIC.
What level of risk is associated with GICs?
GICs are a low-risk investment, providing stable earnings through a fixed rate of interest. But the low-risk nature of the investment means that returns may be comparatively lower over the long-term than that of equities, mutual funds and others.
The value of market or index-linked GICs varies according to stock market conditions, so the rate of return is not guaranteed. These products do, however, protect your initial principal. It should also be noted that interest earned on GICs held outside of tax-sheltered accounts linke RRSPs or RESPs may be taxed as a source of income.
The Canada Deposit Insurance Corporation (CDIC) insures deposits in GICs with an original date of maturity of five years or less.
Why should I invest in a GIC?
GICs may be an appropriate choice for short-term savings, with interest rates comparable to that of a high-interest savings account. The different dates of maturity provide the flexibility of generating earnings without having to make longer-term investing commitments. GICs can also be used to balance an investment portfolio, complementing higher-risk stocks and mutual funds.
GICs can be held inside registered plans such as Registered Retirement Savings Plans (RRSPs), Registered Education Savings Plans (RESPs) and Registered Disability Savings Plans (RDSPs).
As with any financial product, it pays to shop around to find the GIC that best suits your needs. GICs can be purchased at banks, credit unions and other financial institutions across Canada.