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Finance
How to pick the right GIC
What you need to know before investing in GICs
By James Dolan
Offering guaranteed income and 100% security of capital,
Guaranteed Investment Certificates (GICs) are the go-to in-
vestment of choice for conservative-minded investors.
That said, GICs are by no means “simple” investments. Here’s
a brief explanation of some of the important things which
you need to keep in mind when buying a GIC.
What is a GIC?
When you buy a GIC, what you’re actually doing is lending
the bank or financial institution your money for a set period
of time (the term). In return, the bank guarantees that you’ll
receive the amount of your deposit back at the end of the
term. And, in most cases, it will pay you interest along the
way.
GICs are typically considered to be one of the safest ways
in which to invest. That’s because when you invest in a GIC,
your principal is protected (up to set limits) by the Canada
Deposit Insurance Corporation (CDIC). However, this protec-
tion does not apply to GICs denominated in U.S. dollars, or to
GICs with terms of longer than five years.
Types of GICs
In fact, if you go into a typical bank or financial institution,
you’re likely to see more than a dozen different kinds of GICs
on offer:
Cashable GICs
These GICs are either fully or partially cashable at any
time, although penalties usually apply if you cash in
before 30 days. The term is anything from a single day
to five years. Interest is usually payable annually or semi-
annually.
Non-cashable GICs
These GICs are “locked in” for a given term, which could
be anything from six months to 10 years. Interest might
be payable monthly, semi-annually, annually, or com-
pounded annually and paid at maturity.
Variable-rate GICs
These GICs function much like a cashable or non-cash-
able GIC, except the interest rate is linked to the lending
institution’s prime lending rate and fluctuates according
to movements in the linked rate.
“Escalator”GICs
These are multi-year GICs that offer progressively higher
interest rates for each year for which you hold them –
usually three to five years. Usually, the rate increases on
the anniversary date of deposit.
Equity-linked GICs
An equity-linked GIC has its return (and interest pay-
ments) calculated according to the performances of a
portfolio of stocks, mutual funds, an index, or a group of
indices over a given time period (the term).
Nearly all come with a principal guarantee so, even if the
market or index loses money over the term, you won’t.
However, unlike most other GICs, there is usually no
guarantee of interest payments. Most come with a “return
cap”; that is, investors participate in the return of the un-
derlying equity only up to a certain point.
How to invest
Now that you have a good idea of the different types of GICs
out there, here are some basic tips for buying them:
How long do you want to invest?
Need access to your money? Be sure to purchase a cash-
able (or “redeemable”) GIC. With almost every other type,
you won’t be able to get your money back until the end
of the term.
Shop around
GICs are not a commodity product; each institution offers
different variations and interest rates can vary, too. So be
sure to shop around to find the one that’s right for you.
Think about rates – but don’t obsess
Don’t assume that the GIC with the higher interest rate is
the best investment. Lower-paying GICs often offer more
flexibility or more attractive features.
GICs can be an important part of your portfolio, but they
do require some careful consideration before investing. So
be sure to do your homework, and speak to a financial
professional before you invest.