GICs are secure investments with a variety of interest rate, investment term, and interest payout options. The investor's principal and interest are usually guaranteed and the original investment amount is protected. Guaranteed investment certificates help to create a balanced investment portfolio by adding security and stability.
Types of Guaranteed Investment Certificates
GICs are similar to Canada savings bonds, in that they are safe investments issued for a predetermined length of time. One key difference is that GICs are either redeemable or non-redeemable. Redeemable GICs generally pay a lower interest rate in exchange for the option to cash out early, if needed. Non-redeemable GICs cannot be cashed out early without forfeiting some or all of the interested earned.
Guaranteed investment certificate terms range from one day to ten years or more. Interest rates vary; shop around and compare GIC products for the best interest rate and terms.
How to Ensure a GIC is Protected
GICs protect the investor's original investment up to a certain limit. Buy GICs from members of the Canadian Deposit Insurance Corporation (CDIC) for automatic insurance on GICs of up to $100,000 with each financial institution. Major banks, credit unions, and caisses populaires generally offer this protection; however, it is up to the investor to ensure the seller has this insurance.
In Canada, the following GICs are not protected by the CDIC:
- GICs with terms over five years
- U.S. Dollar GICs
- GICs worth over $100,000 at one financial institution
Investors with over $100,000 in GICs can purchase these investments from different financial institutions to ensure their entire principal is protected.
Important Questions About GICs
Before investing in a GIC, call or visit several financial institutions to compare interest rates, terms, and early redemption penalties. Ask each representative the following questions:
- What is the interest rate and how is it paid out?
- What is the penalty and process for cashing out early?
- How much money will this GIC make in total throughout the life of the investment?
- Are there purchasing options, ie.: direct withdrawal from a bank account, lump sum payment?
Long-term investment GICs generally pay higher interest rates. Some guaranteed investment certificates offer set interest rates, while others offer flexible rates linked to stock market performance. Examine several options to make an informed choice.
GICs and Other Long-Term Investments as a Part of a Balanced Investment Portfolio
Guaranteed investment certificates and bonds create stability and security in an investment portfolio. Other investments with varying degrees of risk and reward include forex trading, mutual funds, stock market trading, and real estate investment.
Contact a professional investment specialist for a portfolio evaluation and investment recommendations based on age, income, desired retirement savings, and tolerable risk level.
Sources:
- Canada Deposit Insurance Corporation, GICs and Other Term Deposits, accessed September 22, 2009.
- RBC Royal Bank, What are Guaranteed Investment Certificates? accessed September 23, 2009.
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