GIC: What Are Guaranteed Investment Certificates?
In these volatile times, many investors and savers are looking for a very safe investment. One of the options you have, if you want safety and guaranteed income, is a Guaranteed Investment Certificate (GIC). Many investors like to add them to their portfolios for stability.
What is a GIC?
GICs are a form of investment where you agree to lend money to a bank for a set amount of time. The bank agrees to pay you a certain percentage of interest to borrow this money. You are guaranteed a return as long as you keep your money in the bank for a specified amount of time. Terms on GICs generally run from as little as 90 days or as much as 10 years.
The longer you are willing to keep your money in the bank, the more likely you are to receive a higher interest rate. This safety, though, comes with a price as there are some risks involved. First of all, even the GICs with the highest yields are unlikely to provide you with the kind of return that results in long-term wealth building. A GIC is not likely to keep up with stock market returns. Additionally, you might find in some cases, that GICs don’t even keep up with inflation.
Since you are agreeing to lend your money for a certain amount of time, there are often downsides to breaking that agreement and withdrawing your money early. With some GICs, there may be a penalty when you withdraw money before maturity. If the interest on your GIC only pays out when the instrument matures, you may not earn any interest when you withdraw early.
If you think that you might need the money before the GIC maturity, you might want to look into redeemable GICs. Redeemable GICs allow you to withdraw your money without penalty. However, there is a trade off for this flexibility:
Redeemable GICs often come with lower interest yields.
When Do GICs Make Sense?
It’s important to weigh the pros and cons of GICs. While you probably don’t want to try and build an entire portfolio out of GICs (especially if you are trying to build a nest egg), they do have their place in a diversified portfolio .
Guaranteed Investment Certificates may be a good investment choice if you want a safe, short term, place to save your money. If you are interested in capital preservation for a portion of your portfolio, as a safety net to offset some of your riskier assets (like stocks ), GICs can be a good choice. Choose longer-term GICs, like those with five to 10 year maturities, for long-term capital preservation.
In some cases, you might come into a large amount of money. GICs can be useful if you simply want to hold your money while you decide what you’d like to do with it for the long term. Short-term GICs ranging from 90 days to 12 months can help you earn a better return than you’d get in a savings account while you formulate your next financial move.
Finally, GICs can be used as a part of a fixed income portion of your portfolio. Many retirees like to move a large portion of their assets into GICs, since they provide reliable income.
With the right planning, GICs can be a good part of your portfolio, and a solid part of your future finances. If you’re looking to invest on GICs, I recommend signing up for a Tangerine account (use Orange Key 35090351S1 to get a $50 bonus ) and going with either the Tangerine Tax-Free Guaranteed Investment (TFSA) or Tangerine RSP Guaranteed Investment (RRSP) options.
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