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What is a Guaranteed Investment Certificate (GIC)?
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Banking Canada
- Last Updated:
A Guaranteed Investment Certificate (GIC) is an investment option that guarantees a return.
GICs are a great option if you want to start investing and aren’t sure where to start, diversify your portfolio, couldn’t be bothered with the stock market, or maybe you are just looking for a safe and easy way to invest.
All of the banks and and most financial institutions will have a variety of terms that you can invest your more for and they can calculate exactly how much you are going to earn by the end.
It’s important that you do your research and compare the rates at each bank or institution to ensure you are getting the best rate. Consult with an advisor before making any financial investment and ask the questions you may have.
How Does a GIC Work?
A Guaranteed Investment Certificate (GIC) is one of the lowest-risk investment types that offers a fixed or variable rate of return at maturity. When investing in a GIC you are essentially agreeing on an interest rate you will be paid once the term is over.
For example, lets say you select a 1 year GIC with a 3.5% interest rate. It you were to put $10,000 into the GIC, you’d earn $350 by the end of the year.
Some GICs are cashable, which usually come with a lower interested rate. While other GICs are locked-in (non-redeemable), meaning if you need to withdraw your money before the term is over you may have to pay a penalty. Most GICs are non-redeemable.
Advantages of a GIC
There are many advantages to investing in a Guaranteed Investment Certificate (GIC):
Potential to earn tax-free gains: If you purchase a GIC through a registered account such as a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP), the interest earned is tax-free.
Guaranteed Return: Unlike other investments such as stock or ETFs that fluctuate and have the potential for loss, the interest on a GIC is fixed for the term of the investment. You can calculate exactly how much you are going to make with a GIC.
Diversification: Adding a GIC to your investment portfolio is a great way to diversify and reduce overall risk.
Compound Interest: Reinvesting your GICs principal and accumulated interest time after time is one of the safest ways to earn compounding interest.
Disadvantages of a GIC
Although GICs have their advantages, there are some disadvantages as well:
Your money is locked: Buying a GIC means you are locking your money in for a term and won’t be able to access it until the term is up. To get your money before the maturity date you may have to pay a penalty fee for breaking the contract with your financial institution. Alternatively, you could use the GIC ladder.
Tax: If you hold a GIC through a non-registered account, any interest you earn is taxable. Consider purchasing a GIC through a TFSA, RRSP, or any other registered account.
Pulling your money before the maturity date: Some institutions charge penalties if you want to withdraw your funds early; these fees can quickly eat into any potential profit from holding onto them longer than necessary.
Smaller Returns: Since GICs are one of the safest investment options, and guarantees a fixed rate at the end of the term, the interest you earn is relatively lower.
Types Of GIC's
GICs are financial products that can help you achieve your savings goals. There are various types of GICs, including:
- Cashable GIC
- Non-redeemable GIC
- Market Linked GIC
Almost every financial institution will offer GICs as a way to invest so setting one up is fairly simple. Banks and credit unions give you the option to hold your GIC is a non-registered account or through a registered account such as:
- Tax-Free Savings Account (TFSA)
- Registered Retirement Savings Plan (RRSP)
- Registered Retirement Income Fund (RRIF)
- First Home Savings Account (FSHA)
Summary
In conclusion, a Guaranteed Investment Certificate (GIC), is one of the lowest-risk financial products offered by financial institutions. Whether it’s saving for a rainy day, future needs, or retirement, GICs can help you build up a solid foundation over time. By understanding what a GIC is and what its benefits and features are, individuals can make an informed investment decision that suits their financial objective.
FAQ
A Guaranteed Investment Certificate (GIC) is an investment product offered by just about every financial institution and credit union that involves you investing a certain amount of money for a set amount of time at a predetermined interest rate.
When you purchase a GIC, you are essentially agreeing to lend the bank money and in return, the bank will give you your principal back plus interest at a rate you agreed upon before your term started.
About the Author
Banking Canada
Banking Canada aims to provide you with useful information to help you better understand your finances. We do not provide financial advice.
About the Author