Guaranteed investment certificates (GICs) are financial instruments that let Canadians invest their money and earn some guaranteed interest in the process. With a GIC, you invest your money with a financial institution (the “issuer”) for a specific period of time (the “term”), and they will guarantee you a return of the principal (the initial amount you invested) and interest at a rate specified in your contract.
Types of GICs
The interest rate specified in your GIC contract can be fixed, variable or to be determined.
Fixed rate GICs
Fixed rate GICs, the most well-known GIC product, promise a defined amount of interest payable at specified periods during the term. For instance, $10,000 invested in a 1-year GIC at 1.50% will return the principal plus $150 of interest for a total of $10,150 upon maturity.
Variable rate GICs
Variable rate GICs, on the other hand, offer rates that may change over the term of the GIC. Variable rates are dependent on a fluctuating interest rate benchmark, usually the financial institution’s Prime rate. If you expect that rates will increase while your money is tied up in your GIC, investing in a variable rate GIC will enable you to benefit from those increases. If rates decrease over the term, however, so will your rate of return.
Market- or equity-linked GICs
Finally, market- or equity-linked GICs offer a return based on the performance of an underlying stock market index. With these GICs, your rate of return is not determined until maturity. Market-linked GICs offer the possibility of greater returns if the market performs well. Conversely, if the market doesn’t perform well, you may see no return – other than your principal, which is guaranteed.
Features and restrictions of GICS
There are a number of features and restrictions to consider, before you invest your money in GICs:
- Issuers usually require a minimum amount to be invested in a GIC. It is often as low as $500 but can be more.
- There are no fees involved in purchasing GICs.
- GICs can be purchased for terms as short as 30 days and as long as 10 years. ( CDIC will not insure deposits with initial terms longer than 5 years. See our deposit insurance section for more information.)
- Issuers generally pay higher interest rates on GICs with longer terms.
- Issuers also sometimes pay slightly higher rates of interest on larger investments.
- Interest can be paid monthly, semi-annually, annually, or be automatically reinvested (compounded) until the maturity date.
- Cashable GICs give you the freedom to withdraw your money early (after the closed period) with no penalty.
- Many financial institutions offer redeemable GICs, which allow you to cancel the contract prior to maturity, subject to certain conditions. The features of these products vary considerably from one issuer to another, so it’s important to read the fine print before purchasing.
- With non-redeemable GICs, however, you commit to leaving your money with the issuer for the term of the contract. Breaking the contract requires the issuer’s agreement. If you are able to withdraw your investment before maturity, you may lose all interest earned and have to pay a penalty for early withdrawal.
Why do banks offer GICs?
To understand why financial institutions offer GICs, it’s important to understand how they operate in general. Financial institutions lend money all the time: for mortgages, new cars, and all sorts of other consumer and business purposes. But where do they get this money to lend? Generally speaking, they use the deposits (a.k.a. the money you put in the bank) they have on-hand from savers to lend to borrowers. In this regard, a financial institution acts as an intermediary: it pays interest to a depositor to bring money in, then turns around and lends it out at a higher rate to a borrower.
Simply put, GICs are a tool used by financial institutions to attract funds, in order to make loans. GICs are ideal sources of funds because, for many GICs (particularly non-redeemable GICs), they have the guaranteed use of your money for a specific period of time; this helps the institution balance it’s lending and borrowing activities.
Why invest in a GIC?
As the name indicates, the allure of a GIC is that your investment is guaranteed. Unlike more volatile investments, such as stocks, GICs shelter investors from the possibility of a loss due to market fluctuations. GICs do not generally hold the promise of very high returns, however, but are considered safe, conservative investments. GICs can also fulfill the fixed income component of a diversified investment portfolio.