Guaranteed is not a word you often hear in investing, but when you buy a Guaranteed Investment Certificate, or GIC, you can bank on that promise. In exchange for tying your money up for a period of time — say anywhere from 30 days to 10 years — your principal will be 100% protected. GICs are dependable workhorses of the investment world, but there are some things to consider before you load up your investment portfolio with these low-risk investments.
What is a GIC?
A guaranteed investment certificate, or GIC, is a loan you make to a financial institution. In return, you receive a guaranteed return. It’s the set-it-and-forget-it of investment products, which makes it a popular choice for investors who want to keep their capital secure while generating some income via interest. GICs rise and fall in popularity depending on the level of interest payment offered.
How is a Guaranteed Investment Certificate protected?
Financial institutions that sell GICs are legally obligated to return your principal investment plus interest. To add another layer of security, the Canada Deposit Insurance Corporation (CIDC) will ensure that your principal and payments — up to $100,000 per account per CIDC financial institution — are guaranteed in the event your bank runs into any financial trouble.
How does a GIC work?
A GIC is a piggy bank that pays you — but you have to keep your money in the bank for a specified term. The term can be as low as 30 days and as high as 10 years, depending on the type and structure of the GIC. Generally, the longer the term and the more you’re willing to lock in your funds, the higher the rate of interest.
Types of GICs
GICs come in various shapes, but they all provide a way for you to keep your savings secure for a specified term and gain a little income as well. The variables here are the amount of income the GIC generates for you, such as its liquidity, length of term, and its exposure to risk.
Fixed rate GICs
The interest rate on this GIC is fixed for the entire term of the investment. If you opt for a GIC that pays out its interest either monthly or annually, then this product will give you a predictable income stream.
These GICs offer the option of cashing in early, either full or in part after 30 days. The minimum term for a cashable GIC is one year and while you can redeem these certificates without penalty (i.e. there is no charge for early redemption), the GIC contract may indicate a reduced interest rate payment on the funds redeemed.
If you’re looking to dip your toe into equity markets, but are nervous about losing your money, you could explore a market-linked GIC. These GICs are tied to a specific stock market index, for example, the TSX. If the market performance dips below the guaranteed minimum — resulting in potential a loss — you’ll get the guaranteed rate. But there’s a catch: If markets surge higher over the full term of your GIC, you’ll only receive the amount up to the maximum guaranteed by the product.
The pros and cons of GICs
Benefits of GICs
There are several benefits to holding a GIC:
- Protection for your principal When you invest, you often have to accept that your investment may not work out as planned and it could lose you money; that’s not the case with a GIC. Your principal is always protected.
- Guaranteed returns With the exception of market-linked GICs, your investment payout is predictable.
- Flexibility Whether you’re investing for a short period or have long-term goals in mind, there could be a GIC to fit your needs.
- Maintenance-free This is truly a set-it-and-forget-it type of investment and can be ideal for someone who is looking to offset market volatility.
When words like “guaranteed” and “protected” are used to describe something, you don’t expect it to have many drawbacks, but there are a few to consider before you invest in a GIC:
- Locked in Your money will be out of reach for some or all of the time you’ve invested in a GIC depending on how the GIC is structured.
- Low interest rates If the interest rate on your GIC is lower than the rate of inflation it can erode your purchasing power. GICs can limit the upside to your returns as well. That’s because the protection of capital invested comes at a cost and may not reach the high returns offered in other asset classes. You may not be able to reach all of your investing goals by owning GICs.
GICs: Risks and considerations
Other key considerations to keep in mind:
- Costs and fees Depending on the financial institution or type of GIC, your investment may be subject to certain fees, including:
- Administration fees. These fees are typically small and may be waived if you meet a certain account balance or certain transaction requirements.
- Transfer fees. If you transfer your GIC funds to another financial institution before the end of the term, you may be subject to transfer fees.
- Foreign exchange fees. If you invest in a foreign currency GIC, you may be subject to foreign exchange fees when converting your Canadian dollars to a foreign currency.
- Penalties Cashable GICs don’t typically pay any interest if you take an early redemption and withdraw the money before a set period, typically between 30 and 90 days. Early redemption after a set time period may result in a lower interest payment (these terms are identified in the GIC contract prior to purchase).
- Inflation GICs typically offer a fixed rate of return, which means they may not keep up with inflation. Your purchasing power may decrease over time.
- Tax The income your GIC generates is taxable, but how that income gets taxed can depend on a few factors. GICs held in a registered account — other than a Tax-Free Savings Account or a First Home Savings Account if used to buy a first home — would only be taxed upon withdrawal. GICs held in non-registered accounts would be subject to tax when you receive the income or withdraw the funds. If the GIC doesn’t pay out its interest until maturity, you would only be subject to tax when any interest income is paid to you.
- Auto-renewals All financial institutions are required to notify clients holding renewable certificates ahead of any auto-renewal. It’s another good reason to make sure your financial institution has your updated contact information.
Buying a GIC
Key considerations when getting started:
- Term The period of time you agree to keep your investment in the bank, usually 30 days to 10 years in Canadian banks.
- Lock-in period The term your investment is locked in and generating interest.
- Rate GIC rates vary by product. If you want some certainty on your return, you can get a fixed-rate GIC, otherwise you can choose from GICs that are tied to the prime interest rate or other things like a securities index.
- Returns GICs typically offer steady returns.
How to buy a GIC
- Buying a GIC online with TD Direct investing is easy. Once you open your investing account, you’ll be able to search through the different GIC options available to you.
Cashing your GIC
- Cashable GIC If you think you might need to access your money saved in a GIC before it’s matured, then you may want to consider a cashable GIC. These GICs offer guaranteed returns for the term, although your financial provider may require you to lock in funds for the first 30 to 90 days.
- Non-redeemable GIC If you want a better interest rate and are confident you can lock in your money for the length of the term, then a non-redeemable GIC could be a good option. Some financial institutions may allow you to access the funds in an emergency, but you would have to talk with your provider to see if they’ll make an exception, and there could be a penalty.
GICs and other investments
GICs vs. mutual funds
If you’re worried about losing money, GICs may be an attractive option. Aside from protecting 100% of your principal, they guarantee your return if held to maturity. If you can afford to accept a little volatility in exchange for the potential to earn higher returns, then you could consider looking at a mutual fund. While mutual funds do not guarantee returns, they have the potential to outperform GICs over time. Unlike a GIC, you can also withdraw your funds at any time. Still, mutual funds charge higher fees and are not protected by CDIC.
GICs vs. bonds
GICs are issued by banks and credit unions, while bonds are issued by governments and corporations. GICs tend to be less liquid than bonds, as most lock in your funds until maturity. Bonds do not have such a period, though they do have a maturity date. If you want to sell your bond before this date, you can do so, but the price you receive will depend on the current market interest rates and the creditworthiness of the issuer. GICs are low-risk, fixed-income investments that are insured and offer a guaranteed rate of return. Bonds offer the potential for higher returns and greater diversification but are slightly higher risk and subject to fluctuations in the fixed income market.
How much money is required for a GIC in Canada?
The amount varies by institution and type of GIC, but anywhere from $500 to $10,000 is common for an initial investment.
Are GICs a good investment?
That’s your call. GICs offer a fixed rate of return. They can be a good investment if you want to keep your initial investment secure while generating some income. They are the slow cooker of investment products. You can set it and forget it, and when the term is up, your money will be right where you left it.
Are GICs liquid?
No. GICs will lock in your money for a specified term.
Can you have a beneficiary on a GIC in Canada?
There are some types of GICs that will allow you to name a beneficiary. Check your contract.
Does a GIC count as income?
Yes. The interest you receive from a GIC is taxed as income, although you can defer — or in some cases eliminate — that tax burden by holding your investment in a registered account.