What is a GIC? Pros, Cons, Examples, and When to Invest?

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What is the most important aspect to think about while making investments? Is it high-interest rate or safety of capital? Well, there is no single answer to this question. It all depends upon your risk appetite.

Learn about Guaranteed Investment Certificates (GICs) that are often considered a safe investment.

KEY HIGHLIGHTS

• GICs are a traditional investment option. They let you earn fixed-interest income on your investment.
• GICs are offered by all the major Canadian banks and Credit Unions. The interest rates fluctuate based on economic situations.
• GICs have low credit risk. However, the return might fail to beat inflation.

What are GICs? – Explained

How much does the safety of capital excite you? Is it your number one priority while investing? – If yes, The GICs can be the best investment option for you.

GICs are fixed-income investment products that are offered by almost all the major banks, credit unions, and other financial institutions. They carry a fixed interest rate and maturity period.

Let us understand it with an example.

• A 1-year CIBC flexible GIC is available at 3.75% p.a.
• If you invest $5,000 in this scheme, you will get an annual interest of $187.50.
• At the time of maturity, you will get $10,187.50
• You can further renew your GIC or get the principal and interest in your bank account

Traditional and existing for a long time – GICs can help boost your fixed income.

Are GICs insured by the Canadian Government?

YES. The Canada Deposit Insurance Corporation (CDIC) covers your GIC deposits. All the deposits held at Canadian banks are insured up to $100,000.

That is to say, if your total bank deposits (including the amount invested in the GICs) exceed $100,000 and your bank fails – you will get $100,000 from the CDIC. Any deposit amount above $100,000 will not be covered by CDIC and will be your loss.

Types of GICs

There are several types of GICs available in the market. These are:

• Fixed Rate GIC: Your GIC rate remains fixed throughout your tenure
• Variable Rate GIC: Your GIC rate increases or decreases based on the issuer’s prime rate
• Step-Rate GIC: You start with a lower GIC rate, which increases every year
• Market/Equity Linked GIC: Your GIC returns are tied to the market.

For a better and more detailed understanding of the different types of GICs available in Canada – Read out – Understanding GICs in Canada.

Pros of GICs

• Low Credit Risk: GICs are safe. They are insured by CDIC. Even when a bank fails, you will get your principal and money back subject to the insurance ceiling.
• Guaranteed Returns: With GICs – you always know what you will get. The interest rates are fixed (except Equity-linked GICs). After investing in GICs, you should not worry about economic recessions or booms.
• No Monitoring Need: GICs are traditional and are meant for the working class. What you invest, does not fluctuate in value. Hence, GICs are low-maintenance products with no need for consistent monitoring.

Cons of GICs

• Low Rate of Returns: You can’t have the benefits of both worlds. GICs are safe, with almost zero risk of capital loss. Thus, often the GIC returns fail to beat inflation.
• Taxable Returns: Whatever interest you earn from a non-registered GIC is taxable. You are required to include the interest income in your total income and pay taxes on it based on the applicable slab rates.

When should you invest in the GICs?

Successful investing depends upon you – your habits, market perception, and financial goals. Below are the top three reasons for investing in GICs:

• You want to reduce overall portfolio risk:
  • Do you feel your investment portfolio is highly volatile? Is it too risky?
  • Balance it out by investing a portion into GICs. This way – you can reduce your risk and overall portfolio volatility.
• You want fixed income:
  • Most of our expenses are fixed – utility bills, mortgage payments, insurance premiums, etc.
  • Then why not boost your fixed income by investing in GICs?
  • GICs can offer fixed returns, which you can plan to meet financial obligations.
• You have a lower-risk appetite:
  • Of course, losing money is a terrible sight. If you feel, you are not a stock market expert and don’t even want to be – invest in the GICs.
  • They are safe, have a lower risk, and are 100% insured by the CDIC