Saving and investing has become increasingly popular in Canada. With such a plethora of saving options available, choosing the best one for you can be difficult. One wrong decision could cost you your savings and make your financial goals seem unattainable. Guaranteed Investment Certificate, or GIC, is one of the safest investment options in Canada.
A GIC could be a great saving option for those who are looking to save their money in a way that guarantees no decrease in value. You will also be able to earn interest on your investment. If you are trying to decide whether a GIC is a right fit for you and your financial situation, you have come to the right place. Today, we are going to examine GICs in more detail. Let’s begin.
What is a Guaranteed Investment Certificate (GIC)?
A GIC is an investment with a financial institution in Canada. It is an investment option that is most popular with those who have a low-risk tolerance. A GIC is determined as low-risk because you are guaranteed to get back all of the money you have invested, plus any interest you have accrued. They are usually fixed-term investments, meaning that you will pre-decide a time frame upon which you will receive your returns.
It is possible to invest in short-term or long-term GICs, depending on your financial goals. GICs are similar to savings accounts. This is because the interest rates are consistent and not dependent on the stock market’s strength or economic changes. A GIC is very easy to set up and can be done in person or online.
There will usually be a minimum investment amount, but this figure varies depending on the type of GIC and the financial institution. Usually, the longer the contract’s length, the higher the interest rate you will be offered by your GIC provider. For example, those who choose a 5 year or 10 years term will receive a better rate of interest than those who opt for a 1 year or 2-year term.
When choosing your GIC, it is essential to consider your financial goals and the time frame that you are looking to invest for. Once your money is in the GIC, you are supposed to keep it there until your fixed term ends. Some GICs will not allow you to remove your money until the term ends. Others will allow you to remove the money but will require you to forfeit any interest you have accrued.
Type of GICs
Cashable GICs are a popular investment type offered by many financial institutions in Canada. Cashable GICs are usually a fixed 1-year term. They will often have 30 days or 90 days closed period where you cannot access your money. After this 30 days or 90 days period, you can cash out your GIC at any time, without any negative impact on your investment.
Your interest rate is calculated based on at what point in your fixed term you remove your money. For example, if your cash in your GIC after five months, you will receive the interest rate you earned over the five months. Whereas if you do not cash out until the 1 year is up, you will receive the full rate of interest.
A cashable GIC can be very beneficial to those who want to access their money without being penalized. However, the interest rates tend to be lower than other GICs. This could result in a lower overall value of your investment.
You can redeem a redeemable GIC at any point after purchase. Unlike cashable GICs, there is no waiting period. A redeemable GIC will usually be subject to an early redemption rate. They are popular because you can cash in your investment at any time while still protecting your initial balance. You will also still receive some interest, although this rate is based on when you remove your funds.
With a redeemable GIC, the earlier in the fixed term you remove the money, the lower your interest rate will be. So, funds that are removed after six months will have a lower rate of interest than funds released after ten months.
A non-redeemable GIC gives you higher interest rates because of the less flexible redemption options. This investment option involves choosing a set contract term, for example, 1 year. If you withdraw the money before your term is complete, you will have to pay the penalty. Non-redeemable GICs are popular in Canada because they offer a guaranteed return.
The higher interest rate allows you to earn more interest on your investment. However, ensure that you commit to your GIC contract’s full term, or you may lose money.
Registered GICs provide better overall returns compared to non-registered GICs. This is because they are not taxed. This allows you to increase the value of your savings. A non-registered GIC will be subject to tax, decreasing the overall value. However, it is much harder to withdraw money from a registered GIC compared to a non-registered GIC, even if your contract term has ended. This is because there are more regulations and penalties attached to these GICs.
The higher earning potential of a registered GIC can make them more preferable than a non-registered GIC. However, there is more flexibility with a non-registered GIC, and your money is easier to access at the end of your agreed term.
Market-linked GICs differ from other GICs because they are linked to the stock and equity markets’ performance. A market-linked GIC combines a traditional GIC with a stock market investment. They are a popular type of GIC in Canada because you are guaranteed your original investment amount. You may also get a higher overall return, depending on the performance of the stock market.
A market-linked GIC is normally taken out over a 3-year or 5-year term. If the market performs well during this time period, the potential gains could far exceed what you could earn from the interest rate on a traditional GIC. Your GIC will be linked to a specified market index in Canada. If the index rises over the contract length, your return will be higher. If it falls or stays the same, you will only receive your original investment amount.
Foreign Currency GICs
A foreign currency GIC allows you to earn interest on a foreign currency. It is a low-risk investment option as the majority of your investment is protected. The interest rate is normally based on US dollars. One of the most attractive features of these GICs is that you can earn a guaranteed return on interest. There is also the possibility of making an additional profit on exchange rates.
However, a foreign currency GIC will usually have a lower interest rate than other GICs. Depending on the financial institution, you can either earn a fixed rate or a fluctuating rate of interest in the foreign currency. If the Canadian dollar falls against the foreign currency, you can earn additional money. However, if it rises, you risk losing money.
How GIC Deposits are Insured
Ensuring that your investment is protected is a common concern for many Canadians. If you take out your GIC with any major bank or financial institution in Canada, you should be protected. Candian banks are members of the Canadian Deposit Insurance Corporation (CDIC).
A credit union, or Caisse Populaire, if you live in Quebec, should be covered by a similar insurance plan. CDIC insurance will cover your investment up to $100, 000. Any amount above $100, 000 may not be protected. To ensure ant investments above this figure are still insured, you can take out multiple GICs. You can do this with different banks or financial institutions. It is important to bear in mind that a GIC for a term length longer than 5 years may not be covered by insurance.
How Can I Purchase a GIC?
GICs are offered by many banks and financial institutions in Canada- including the Big 5; Bank of Montreal, CIBC, Royal Bank, Scotiabank and TD Bank. However, getting a GIC from the Big 5 is not your only option. More than 70 institutions are offering GICs across Canada. These include Trust companies and credit unions.
Different institutions will offer different rates. Rates are now so competitive that many investors find themselves confused about where to start. So how do you choose the best GIC for you, with the best possible rates and over a time-frame that you are comfortable with?
Below, we have compiled a list of the most popular ways to purchase a GIC.
- Online brokerages – This allows you to manage your GIC yourself. You merely need to open an account with your chosen brokerage and then provide your banking information. You then can search for the rates, term length and type of GIC you are interested in.
- Independent deposit brokerages – They deal with multiple financial institutions. The brokerage will act as a ‘middleman’ between you and the financial institution. These kinds of brokerages are usually able to offer higher interest rates.
- Directly with the bank or financial institution – You can go into a branch or contact them over the phone or online, and they can help you to set up your GIC account. Ensure you are informed of the rates and compare this with the rates offered by other institutions. Usually, you will already need to have an account with a bank before opening a GIC. Savings accounts and current accounts will be accepted.
- A credit union or Caisses Populaires – As these are forms of co-operatives, you will need to be a member before you can open a GIC.
Questrade is the biggest online trading platform in Canada. As well as being able to trade stocks, forex, ETFs and other traditional trading equities, you can also invest in GICs. A GIC account with Questrade allows you to look at different rates and contract lengths of different GICs. You can then find the best GIC to suit your needs.
Questrade also gives you the option to open a practice trading account. This allows you to invest in GIC for a practice period to see whether it is the best investment option for you. It also allows you to test Questrade’s platforms and see if it works for you. Questrade’s pricing is easy to understand, with no hidden fees. See also ‘Qtrade vs Questrade’ review.
- Trading GICs is commission-free. They also charge no annual fees.
- Depending on the type of GIC, you have the option to have your interest paid in a variety of ways. This includes monthly, quarterly, semi-annually, annually or once your GIC contract term matures.
- You can choose to invest in a cashable or non-cashable GIC.
- There are different rates available to suit your needs.
- Questrade is regulated by the Investment Industry Regulatory Organization of Canada (IIROC). It is also a member of the Canadian Investor Protection Fund (CIPF). The strict regulations help to protect your GIC investment.
- Questrade is available to contact via phone, email or via the ‘contact us’ section of their website. Their customer service is rated highly.
- Multiple trading platforms are available, including the desktop site and the mobile app.
- There is a minimum order amount of $5, 000.
- You may not be offered the best rates on the market. Ensure you research available rates thoroughly before making a decision. If you have further questions regarding the rates offered by Questrade, contact them using the ‘contact us’ section of their website.
As the biggest online brokerage in Canada, Questrade is a great option for those looking to invest in GIC. Their great customer service and high-tech research tools explain why they are so popular in Canada. They also have a wealth of available information. Whether you are looking for cashable or non-cashable GICs, Questrade allows you to open a GIC account accordingly.
However, if you are looking to invest less than $5, 000 in GIC, Questrade may not be the best option for you – see ‘Interactive Brokers vs Questrade’. post.
Are GICs the Right Investment for Me?
Deciding whether GICs are the right investment option for you depends on what your investment goals are. Below are some of the reasons a GIC may be a good investment option for you.
- Short/ medium-term investment goal – For those who are saving for a short-medium term goal and would like to access their money within 5 years, it may be more prudent to invest conservatively with minimal risk. A GIC gives a guarantee that you won’t lose your initial investment. You also don’t have to worry about changes in the market or the economy. Those who are looking for a 5-year investment or less are best suited to GICs.
- Guaranteed rates of interest – Savings accounts are also seen as being a safe investment option. However, their rates of interest are not guaranteed. Banks can change the rates based on any market or economic changes. However, with a GIC, the rates of interest are locked in for the entire contract. This makes it easier to predict the value of your investment upon maturity. Traditional savings accounts may be less easy to predict as you cannot be sure of the rates of interest.
- Minimum investment risks: Unlike many other investment options, a GIC is an extremely low risk. It is guaranteed that you will not lose your initial investment. The rates of interest you can earn on your investment will also allow you to make some gains.
Other Options Available:
A bond differs from a GIC in many ways. It is a type of investment whereby the investor lends money to the bond issuer and receives interest payments. There are many different types of bonds available. These include corporate bonds, municipal bonds and savings bonds. Those who invest in bonds usually aim to live off the interest payments while keeping their investment intact.
The rate of interest will differ depending on the bond you are investing in. However, you may find that you are charged a high commission for each bond you buy. Additionally, a long-term bond may see considerable fluctuations in value.
Exchange-Traded Funds (ETFs) are a collection of securities that track an underlying index. ETFs are traded throughout the day and are listed on exchanges. ETFs can include many different securities, such as stocks, bonds and commodities. The price of an ETF will vary and fluctuate throughout the day. The number of times that an ETF is bought and sold each day can impact this fluctuation.
A mutual fund is when the funds from different investors are pooled together. These funds will be used to invest in a group of assets. The aim is to reach an investment goal. Before deciding which mutual fund to invest in, it is important to prioritize your personal investment goals. Are you looking for long-term investments? Do you have a 1 year,3 year, 5 year or even 10 years goal? A five-year mutual fund is generally agreed to be the ideal time frame. What is your risk tolerance level?
Investing in stocks refers to an equity investment. You invest in a company and receive shares of that company. This entitles you to part of that companies assets. You can earn money from stock in a number of ways. This includes the stock rising in value, which will, in turn, push up the value of the stocks you own. You can also earn money from dividend payments. These are usually paid out quarterly.
The Bottom Line
A GIC is a very popular investment option for many Canadians. The extremely low-risk nature makes it particularly attractive to inexperienced investors. Those who are only looking to invest their money for a 2 year or 3 year period may also be interested.
Your GIC will have a set interest rate. This rate cannot be changed, no matter what happens to the economy or the financial institution you have invested with.
Different GICs have different rates of interest. Similarly, different financial institutions will also offer different rates. It is therefore recommended to shop around before choosing your GIC. Whether you are looking for cashable or non-cashable, registered or non-registered, redeemable or non-redeemable, or any other kind of GIC, there are many options available to you.