What is a GIC (guaranteed investment certificate)? (2024)

GIC – definition and rates

A guaranteed investment certificate (GIC) operates like a special kind of deposit, where after a fixed period of months or years, called a term, you are guaranteed to get your money back along with the accrued interest.

GICs are often referred to as term deposits because, when you buy a GIC, you agree to deposit a sum of money in the financial institution or bank for a fixed period. Typically, the longer the term of the GIC, the higher the rate of interest you can earn on the deposited amount.

Terms can run from 30 days to 10 years, but most people choose GICs with 1-to-5-year terms. Though most GICs typically involve a minimum investment of $500 or $1000, higher minimums may be required in some instances.

GICs can pay out interest on a monthly, semi-annual, or annual basis. GICs that pay interest annually typically offer higher interest rates. Investors can ask for the interest to be wrapped back into the investment, compounding their earnings. GICs are available at most online brokerage firms and can be held in both registered and non-registered accounts.

Are GICs a safe investment?

GICs are issued by financial institutions, and they are also protected by the Canadian Deposit Insurance Corporation (CDIC). For many investors, the perceived strength of the financial institution that issued the GIC, along with the added coverage of the CDIC is sufficient for them to consider GICs a safe and secure investment that carries a low risk of capital loss.

What is a GIC (guaranteed investment certificate)? (1)

Did you know? The Canadian Deposit Insurance Corporation (CDIC) offers coverage up to $100,000 for GIC deposits made at participating Canadian financial institutions. The CDIC program protects investors if a GIC issuer goes into failure or bankruptcy.

How do GICs work?

GICs are loans that individual investors make to a financial institution for a fixed period. In return, investors receive interest paid on the capital. In addition to varying termlengths and interest rates, there are also different types of GICs. The interest generated by a GIC might be treated as taxable income. Therefore, it is a good idea to check with your accountant to work out a fiscal strategy that suits your needs and tax situation.

What are the different types of GICs?

  • Cashable - After an initial waiting period of 30 to 90 days, these GICs can be cashed without penalties. Some cashable GIC products may have minimum redemption and balance amounts, limiting how much you can withdraw before the end of the term.
  • Redeemable - These GICs are typically more flexible than cashable GICs but usually involve some form of early redemption penalty.
  • Fixed-term - A fixed-term GIC commits the investor to a set investment period and, as a result, offers higher interest rates than cashable or redeemable GICs. Terms can range from 3 months to 10 years, and redemption before the end of the term results in losing the accrued interest and paying a penalty.
  • Market-linked - A market-linked GIC is an investment where the return is variable and is linked to the performance of the underlying market or index. At the end of the term, your initial investment is guaranteed, but the interest earned depends on the market’s performance. In a bullish period, when the market is growing, you can expect a higher return on your investment.

Example of a GIC

You put $5,000 into a 1-year fixed-rate GIC offering a 5.20% compounded annual interest rate.

In year one, your accrued interest totals $260 = $5,000 x 5.20%

In year two, at the end of the term, compounded interest totals $533.52 = $5,500 x 5.20%

Total profit or interest income after two years = $793.52

Example of a GIC

What is a GIC (guaranteed investment certificate)? (2)

Note: This example assumes a 1-year fixed-rate GIC offering a 5.20% interest rate, compounded annually.

Should I invest in a GIC?

As part of the fixed-income asset class, GICs can be key to a diversified and well-rounded investment portfolio. Indeed, many self-directed investors have a percentage of their assets tied to this lower-risk asset class to protect against market fluctuations and volatility. For some investors it comes down to their own preferences, they like the simplicity of a GIC.

It is important to remember that, in some instances, the rate of return on GICs or bonds may not outperform inflation. This means that investors can lose purchasing power because their money is not growing at the rate of inflation. There is also an opportunity cost involved since money tied up in a non-redeemable GIC is not available for more money-making investments. The same can apply to bond investors who can sell their bonds before maturity with the risk of selling them below their initial purchase price.

Bonds vs GICs

Bonds can be another viable low-risk option, but there are differences between these two types of investment instruments. Though bonds may typically offer greater flexibility and potentially higher returns, they can be riskier and more complex to manage than GICs and are not covered by the CDIC's insurance program.

How can I purchase GICs on the NBDB platform?

NBDB clients can inquire about GIC rates, terms, and the different issuers available by calling our team or using the secure Message Centre (secure link) on the NBDB trading platform. Once you've decided on the GIC, make your request to our team.

GICs can be a straightforward, low-risk investment option for new and seasoned self-directed investors. Though they lack the dynamism and potentially higher returns of other investment instruments, they can be an asset to include in a well-rounded and diversified investment portfolio. Don’t forget that, even though investing has its risks, research and thoughtful planning can help make your money grow.

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As an investment expert with a deep understanding of financial instruments, I can confidently discuss the concepts presented in the article about Guaranteed Investment Certificates (GICs). My expertise stems from a comprehensive knowledge of various investment vehicles and their intricacies, particularly in the realm of fixed-income assets.

GIC Definition and Rates: A Guaranteed Investment Certificate (GIC) functions as a specialized deposit wherein, after a predetermined period (term), the investor is assured to receive their initial capital along with accrued interest. The terms of GICs can vary from 30 days to 10 years, with longer terms typically offering higher interest rates. The minimum investment is usually around $500 to $1000, and interest payouts can be monthly, semi-annual, or annual, with compounding options.

Safety of GICs: GICs are deemed safe investments as they are issued by financial institutions and are further protected by the Canadian Deposit Insurance Corporation (CDIC). The CDIC provides coverage up to $100,000 for GIC deposits made at participating Canadian financial institutions, offering an additional layer of security for investors in case of issuer failure or bankruptcy.

How GICs Work: GICs essentially represent loans made by individual investors to financial institutions for a fixed period. In return, investors receive interest on the invested capital. The interest earned may be considered taxable income, and it's advisable to consult with an accountant to devise a tax-efficient strategy.

Types of GICs:

  1. Cashable GICs: Allow withdrawal after an initial waiting period without penalties.
  2. Redeemable GICs: More flexible than cashable GICs but may involve early redemption penalties.
  3. Fixed-Term GICs: Commit the investor to a set investment period with higher interest rates.
  4. Market-Linked GICs: Returns are variable and linked to the market's performance, offering potential higher returns during bullish periods.

Example of a GIC: The article provides an example of a 1-year fixed-rate GIC with a compounded annual interest rate of 5.20%, illustrating the calculation of accrued interest over a two-year period.

Considerations for Investing in GICs: GICs, being part of the fixed-income asset class, contribute to a diversified investment portfolio, particularly for those seeking lower-risk options. However, investors should be aware of the opportunity cost involved, as money tied up in a non-redeemable GIC is not available for potentially more lucrative investments.

Bonds vs. GICs: While bonds are another low-risk option, they differ from GICs in terms of flexibility, potential returns, and risk. GICs benefit from the CDIC's insurance, providing an additional layer of security.

Purchasing GICs on the NBDB Platform: The article concludes by explaining how clients on the NBDB platform can inquire about GIC rates, terms, and issuers, emphasizing the straightforward nature of GICs as a low-risk investment option.

In summary, GICs offer a secure investment option with defined terms, providing investors with varying levels of flexibility and potential returns. These instruments play a crucial role in a well-rounded investment portfolio, particularly for those seeking stability and lower risk.

What is a GIC (guaranteed investment certificate)? (2024)
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