What is a GIC?

A GIC or Guaranteed Investment Certificate is an investment that works like a deposit. You deposit money for a fixed amount of time, earning interest over that time. When the investment matures, you get your deposit back plus the interest earned.

Note that it’s important to keep the money deposit for the whole duration of the investment term.  If you were to withdraw your deposit early, you may lose some or all of the interest you may have earned.

A GIC simply, is lending money to a financial institution and getting paid interest in return. As such, it’s considered a safe investment because returns (deposit and interest) are guaranteed. Whilst it’s a safe way to build savings, it’s a slow growth in comparison to other investment options.

When does investing in a GIC make sense?

GICs can be a great option depending on your situation or goals. The following are reasons to consider investing in a GIC:

• Struggling to save? A GIC could be helpful. Withdrawing your deposit will likely incur a penalty, potentially stopping you withdrawing it to spend.
• Saving for a short-term goal? Whether that’s a vacation, home renovation or a wedding, a GIC is an easy way to keep your savings safe and earn some interest.
• Retired and need access to money soon? GICs are considerably less volatile than other investment options. A GIC is a low-risk option especially when you don’t have time for an investment to gain from a potential downturn in the market.
• Teaching kids about investing? A GIC is a great starting point to understand how to invest their savings.
• Want a balanced investment portfolio? As a fixed-income investment, a GIC can reduce risk and volatility in your portfolio.
• Nervous to invest in the stock market? The volatility of the stock market means some people will choose not to invest. But holding onto cash means missing out on growth opportunities. A GIC is a great start to investing: low risk, safe and usually better interest rates than saving accounts.
• Interest rates rising? In such a scenario, it becomes expensive to borrow money. But it becomes more attractive (and even lucrative) to save money using GICs or high-interest savings accounts.

Choosing a GIC

Choosing a GIC will more often than not come down to when you need the money and if you cash it in early. In such a scenario, penalties can be imposed so it’s important to decide what type of GIC to invest in.

If you withdraw money from a regular GIC, you will likely pay a penalty. You may sacrifice any interest earned on your money, and you may need to withdraw all of your investment.

A cashable GIC has a short lock-in period (between 30-90 days) after which you can withdraw your money at any time. You won’t incur a penalty but the interest rate will be lower due to the flexibility of early withdrawals.

A redeemable GIC also allows you to withdraw your money early. Usually the term is one to five years where your money is locked in. A penalty might apply, but the option is available to access your money if needed. Like a cashable GIC, the interest rates tend to be lower.

Things to consider when buying a GIC

1. Select a term or time that works with your goals. You can choose to invest in a GIC for six months, a year or even five years.  The interest rate you will earn will vary based on the term you choose.
2. Decide on a fixed or variable interest rate. Most GICs will pay a fixed interest rate, and so you will know how much money you will receive at the end of the term. If your GIC links to a market or index, the interest you will earn will be based on how the market or index is doing. It’s possible you may receive less than a fixed-rate GIC if the market or index doesn’t perform well.
3. Lock in your investment for the entire term. This is the norm for most GICs, where you may be required to pay a penalty for any withdrawals you make during the term. Some GICs (like a cashable or redeemable GIC) won’t impose a penalty, but the interest rate will be lower.
4. Do you want to receive regular income? If so, you can buy a GIC that will make regular interest payments automatically each month. This would give you a predictable amount of income each month.

Investment strategies

When thinking about your life or financial goals, a GIC is worthy consideration. They can add stability and safety to a portfolio that may be high risk or growth based. There are a couple of strategies you could adopt to help increase your earnings.

A GIC ladder or Laddering is a popular strategy. This is where you buy multiple GICs with different terms. As an example, you have $5000 to invest. You would invest $1000 into a one year GIC; $1000 into a two year GIC, and so on. Every year, you would have $1000 returned to you to either re-invest (into a new five year GIC) or take the cash if you need it.

Another strategy is to buy a one year GIC and re-invest in a new one year GIC when it matures every year for five years. If interest rates rise each year, this strategy works well, potentially earning you more money. But if rates drop, you may regret not locking your money into a longer term.

Which leads onto the next strategy to lock your money into a long term GIC. In this case, the interest rate will usually be higher.