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Everything You Need to Know About Canadian GICs
Guaranteed Income Certificates (GICs) are a popular investment option for individuals seeking a secure and stable source of income. GICs are essentially a type of term deposit offered by financial institutions, where an individual invests a sum of money for a specified period of time and receives a guaranteed rate of return on their investment.
When an investor purchases a GIC, they are essentially lending money to a financial institution for a specified period of time, typically ranging from 1 to 5 years. In exchange for this loan, the financial institution guarantees a fixed rate of return on the investment.
The interest rate on a GIC is determined by several factors, including the term length, the amount invested, and the prevailing interest rates in the market. In most cases, GICs with longer terms offer higher interest rates than those with shorter terms.
GICs are a low-risk investment option, as they are backed by the Canadian Deposit Insurance Corporation (CDIC). The CDIC is a federal Crown corporation that provides deposit insurance to Canadian depositors in the event of a financial institution’s failure. CDIC insures eligible deposits up to $100,000 per depositor, per insured category, at each CDIC member institution.
Why buy a GIC?
There are several reasons why you might want to buy a GIC. First, GICs are considered to be a safe investment. The financial institution that issues the GIC is legally obligated to pay you back your original investment, plus the interest, when the term of the GIC expires. This makes GICs a good option for investors who are looking for a safe way to grow their money.
Second, GICs offer a guaranteed rate of return. This means that you know exactly how much money you will earn on your investment, which can be helpful for budgeting and planning for the future.
Third, GICs are a liquid investment. You can typically withdraw your money from a GIC without penalty, although there may be a small early withdrawal fee.
How to choose a GIC
When choosing a GIC, there are a few factors you should consider, including:
The term of the GIC. How long do you want to invest your money for?
The interest rate. What is the interest rate on the GIC?
The fees. Are there any fees associated with the GIC?
The financial institution. Which financial institution do you want to invest with?
It is important to compare different GICs before you make a decision. You can use a GIC calculator to help you compare different GICs and see how much money you could earn on your investment.
Types of GICs available in Canada
There are several types of GICs available in Canada, including:
These GICs allow the investor to cash out their investment before the end of the term, usually without penalty or with a minimal penalty.
These GICs do not allow the investor to cash out their investment before the end of the term. If the investor wants to withdraw the funds early, they may have to pay a penalty or forfeit a portion of the interest earned.
Also known as index-linked GICs, these GICs provide a return that is linked to the performance of a specific stock market index, such as the S&P/TSX Composite Index.
These GICs offer a gradually increasing interest rate over the term of the investment.
Foreign currency GICs
These GICs are denominated in a foreign currency, such as US dollars, and can provide a higher return than Canadian dollar-denominated GICs. However, they also carry a higher risk due to fluctuations in foreign exchange rates.
These GICs offer the option to cash out the investment before the end of the term, but with a penalty fee or reduced interest rate.
These GICs don’t allow investors to withdraw their investment before the end of the term without paying a penalty fee.
It’s important to note that the availability and terms of these types of GICs can vary among financial institutions, so it’s a good idea to shop around and compare before making an investment decision.
Advantages of Canadian Guaranteed Income Certificates (GICs)
Guaranteed Return: GICs offer a guaranteed rate of return, which means that the investor is assured of getting back their principal plus the promised interest at the end of the term. For example, an investor who purchases a 5-year GIC at a 2% interest rate will receive a return of 10% at the end of the term.
GICs are a low-risk investment option because the principal is guaranteed, making them a popular choice for risk-averse investors. For example, an investor who is close to retirement may opt to invest in GICs to protect their retirement savings.
GICs are available in a range of terms, from as short as 30 days to as long as 10 years, allowing investors to choose the term that best suits their needs. For example, an investor who wants a short-term investment option may choose a 1-year GIC, while an investor who is looking for a long-term investment option may choose a 10-year GIC.
Predictable Income Stream
GICs offer a predictable income stream, which can be particularly beneficial for retirees who want to supplement their income with a reliable source of interest income. For example, an investor who purchases a GIC that pays out interest annually will receive a regular income stream over the term of the investment.
GICs typically do not have any fees associated with them, making them an attractive option for those who want to avoid fees associated with other types of investments, such as mutual funds or ETFs.
GICs can offer tax advantages for those who hold them in a registered account, such as an RRSP or TFSA. In these accounts, the interest earned on GICs is not taxed until withdrawn, allowing for tax-deferred growth.
GICs are insured by the Canada Deposit Insurance Corporation (CDIC), which means that if the financial institution where the GIC is held fails, the investor’s principal and interest up to a certain amount will be protected. For example, if an investor holds a GIC with a bank that fails, the CDIC will ensure that the investor receives their principal plus interest up to $100,000.
GICs often offer the option of compound interest, where the interest earned is reinvested into the GIC, allowing for even more significant growth over time. For example, an investor who purchases a GIC with a 5-year term and a 2% interest rate that compounds annually will receive a return of 10.4% at the end of the term.
Range of Options
GICs come in a range of options, including redeemable and non-redeemable, allowing investors to choose the option that best suits their needs. For example, an investor may choose a non-redeemable GIC with a higher interest rate, knowing that their funds will be locked in for the term of the investment.
GICs can be an excellent way to diversify an investment portfolio because they offer a low-risk option. For example, an investor who has a portfolio consisting of mainly equities may choose to add a GIC to balance out the risk.
Overall, GICs can be an attractive investment option for those looking for a low-risk, predictable source of income. They offer a range of options, making them a flexible investment choice suitable for a range of investors.
Disadvantages of Canadian Guaranteed Income Certificates
While GICs offer a guaranteed return, the interest rates offered by GICs are often lower than other investment options, such as stocks or mutual funds. For example, a 5-year GIC may offer a return of 2%, while the stock market may offer returns of 8-10% over the same period.
Most GICs are non-redeemable, which means that the investor cannot withdraw their funds before the end of the term without incurring a penalty. For example, an investor who purchases a 5-year GIC and needs to withdraw their funds after 3 years will likely face penalties for early withdrawal.
Because GICs have a fixed rate of return, investors may miss out on potential gains from other investment options, such as stocks or mutual funds, which can offer higher returns over the long term.
GICs offer a fixed rate of return, which means that the return may not keep pace with inflation over the long term. For example, if the inflation rate is 3%, and the GIC offers a return of 2%, the investor’s purchasing power may decrease over time.
Interest Rate Risk
GICs are subject to interest rate risk, which means that if interest rates rise, the investor’s GIC may not offer a competitive return compared to other investment options. For example, if interest rates rise, a GIC with a low-interest rate may become less attractive to investors.
Unlike stocks or mutual funds, GICs do not offer dividends, which can be a disadvantage for investors who are looking for regular income from their investments.
Early Withdrawal Penalties
If an investor needs to withdraw their funds before the end of the term, they may face penalties, which can reduce the overall return on the investment. For example, an investor who needs to withdraw their funds from a GIC before the end of the term may face a penalty of 1-2% of the principal.
Limited Investment Options
GICs offer a limited range of investment options compared to other investment options, such as stocks or mutual funds, which can limit an investor’s ability to diversify their portfolio.
GICs are only as safe as the financial institution that issues them. If the financial institution where the GIC is held fails, the investor may lose their principal and interest. For example, an investor who holds a GIC with a financial institution that fails may lose their investment, even if it was insured by the CDIC.
Opportunity for Fees
While GICs themselves do not typically have fees, some financial institutions may charge fees for setting up or managing GICs. These fees can eat into the overall return on the investment, reducing the investor’s net return.
Overall, GICs can be a low-risk investment option, but they may not be suitable for all investors. They offer a limited range of investment options, and their returns may not keep pace with inflation over the long term. Additionally, illiquidity and penalties for early withdrawal can limit an investor’s ability to access their funds when needed.
When to Invest in GICs
GICs are a good investment for investors who are looking for a safe and secure investment with a guaranteed return. GICs are also a good option for investors who need access to their money in a short period of time, as fixed-term GICs can be redeemed early, but with a penalty.
Here are some situations when you might want to consider investing in a GIC:
You are saving for a short-term goal, such as a down payment on a house or a new car.
You need to keep your money safe and you don’t want to take on any risk.
You are looking for an investment with a guaranteed return.
When Not to Invest in GICs
GICs are not a good investment for investors who are looking for high returns. GICs typically offer lower returns than other types of investments, such as stocks or mutual funds.
Here are some situations when you might want to avoid investing in a GIC:
You are saving for a long-term goal, such as retirement.
You are willing to take on some risk in order to earn higher returns.
You need access to your money in a short period of time.
GICs are a safe and secure investment option for investors who are looking for a guaranteed return on their investment. GICs are a good option for investors who need access to their money in a short period of time, as fixed-term GICs can be redeemed early, but with a penalty.
If you are considering investing in GICs, it is important to compare the rates offered by different financial institutions before making a decision. You should also consider your investment goals and risk tolerance when choosing a GIC.
Average yield on Canadian GICs over the past 10 years
The average yield on Canadian GICs has varied over the past 10 years, but has generally been on a downward trend. In 2013, the average yield on a 5-year GIC was 3.5%, while in 2023, the average yield is 2.5%. There are a number of factors that can affect GIC yields, including the Bank of Canada’s interest rate policy, the level of inflation, and the overall health of the economy.
Here is a table of the average yield on Canadian GICs for the past 10 years:
5-year GIC yield
It is important to note that these are just averages, and the actual yield you receive on a GIC will vary depending on the terms of the GIC and the financial institution you purchase it from.
Canadian Guaranteed Income Certificates are a low-risk investment option that offers a guaranteed rate of return for a specified period of time. GICs are backed by the CDIC and offer a variety of term lengths and investment amounts to suit individual needs. While GICs offer a stable and predictable source of income, they also come with lower interest rates and lack the potential for higher returns that come with riskier investments. Investors should carefully consider their investment goals and risk tolerance before investing in GICs or any other investment option