What is a GIC?

While GICs bear certain similarities to other investment products like mutual funds, bonds, CDs, and time/term deposits, they remain distinct from other types of investment vehicles. So what is a GIC? A Guaranteed Investment Certificate is a financial product, usually presenting virtually no risk to the investor’s principle, with the potential for returns.

Minimum GIC investments usually start at $500. The money accrues interest for the period of time (usually 1 to 5 years) laid out in the GIC agreement. The key feature that makes GICsΒ attractive to conservative investors is the principle protection. Even in the possible, but unlikely event of a bank collapse, the principle amount of a GIC held with that bank is still guaranteed by the government through CDIC insurance.

There are typically three types of GICs available to Canadian investors.

Regular GICs are set with a specific term and interest rate. This way the investor can be sure exactly how much money the account will be worth at any given time. Investors can often get access to their money and interest with 30 days notice, even if the agreed upon term has not run its course. But the investor may be motivated to let the account remain active until maturity if the interest rates increase annually, which is often the case with GICs, making the investment worth more as time goes by πŸ™‚

14-09--rate-gic-graph gic

Interest linked GICs have better returns if the national Canadian interest rate increases. For periods of significant increase in interest rates, the investor can stand to profit substantially πŸ™‚ For periods with negative interest rate growth, the investor can cancel the account and reinvest the funds in a more fitting financial product.

Market Growth GICsΒ behaves very similarly to index mutual funds, but without the risk of principal loss. Investors can invest their chosen principal at varied levels of risk in either the Canadian or United States indexes. Unlike standard mutual funds, the balance can never fall beneath the principle invested. Still other GICs can offer a guaranteed minimum return. Market growth GICs can also have maximum returns. Due of the rarity that this interest rate would be exceeded, most people don’t worry about it, but some may choose to put their money in other places, with no limits on growth πŸ™‚

Most GICs today pay about 0.50% to 2.50% annual interest rate, depending on the duration. GICs aren’t for everyone. While there are more aggressive investment strategies with the potential for greater returns, the promise that the investor’s returns will never dip beneath a certain level gives GICs a fitting place in the portfolios of many investors.

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Financial Underdog
09/10/2014 1:04 pm

To answer the main question – “Probably the worst investment vehicle one can pick besides his/her mattress” πŸ™‚

Money Pincher
09/10/2014 3:19 pm

I still remember the good ol’ days when ING offered a 4% interest on a 1 year GIC in US dollars. T_T

Stephen @ HowToSaveMoney.ca
09/11/2014 5:35 am

Well, Tangerine is offering 3% for all “new money” for the next couple of months. No GIC required. That’s better than a poke in the eye with a sharp stick!

09/11/2014 8:34 am

I’d be wary of market-linked GICs and read the fine print very carefully – they seem a bit scammy to me: the distribution of possible returns follow a bell curve and the most likely range of interest rate is usually around 1-3% with outlier possibilities of less than 1% or ~5%. What’s the point if you can just lock into a guaranteed rate of 2-3%??

09/11/2014 9:28 am
Reply to  Steve

Actually, edit that – TD’s Market Linked GIC upper limit outlier possibility is 3.7% interest rate not the ~5% I had indicated – that’s even worse!

09/11/2014 6:17 pm
Reply to  Steve

I’ll go even further: they are deliberately misleading, which makes them a lot scammy in my book. (A related older post on creating a DIY market-linked GIC without needing to use options: http://www.holypotato.net/?p=1018)