A Guaranteed Investment Certificate, or GIC, is a type of Canadian investment in which the rate of return is guaranteed for a fixed period of time. This particular type of financial product is a relatively low-risk investment and therefore produces lower returns than stocks, bonds, and mutual funds. GICs are usually offered by banks or trust companies. These safe and secure Canadian investment vehicles earn interest at a fixed rate, variable rate or based on a market-based index. Many Canadians find Secured Investment Certificates to be an excellent option for a portfolio that requires some measure of security.
How do guaranteed investment certificates work?
With these products you will invest an amount of money (that you determine) over a period of time that is determined by the specific type of GIC you choose. Typically, these time periods vary greatly and can tend to range from 1 day to 10 years. Investments with longer terms will earn more interest than short-term ones. When your Guaranteed Investment Certificate reaches the end of its term (also known as ‘maturity’), you will be able to access not only your initial amount of cash, but also any interest earned.
Some Canadian guaranteed investment certificates require that the amount of money you initially invest remain ‘locked in’ for a minimum period of time (30 days, for example). Other GICs will allow you to access your money before the expiration date. There are even Guaranteed Investment Certificates that allow you to increase your initial cash amount by making weekly, biweekly or monthly contributions.
redeemable vs. Non refundable
Guaranteed Investment Certificates may be redeemable or non-redeemable. As mentioned above, there are some GICs that allow you to access your cash during the term. This is known as ‘redeemable’. With redeemable assets, you will be able to withdraw your cash before maturity. Some redeemable GICs specify that you will earn less interest if you withdraw them before maturity. Non-redeemable counterparties do not allow withdrawals before the expiration date. Non-redeemable GICs may offer higher interest rates than redeemable ones.
interest
This particular type of Canadian asset can be offered at fixed or variable interest rates.
fixed rate GIC
With a fixed rate GIC, your money will earn interest at a fixed rate. That is, the interest earned will be constant throughout the term of the investment. The benefit of fixed rate GICs is that you can predict exactly how much your total assets will be worth on the maturity date.
variable rate GIC
Variable Rate Guaranteed Investment Certificates are linked to the Canadian Prime Rate or stock market yield. With interest rate-linked GIC, you’re guaranteed your money will grow, but you won’t know at what rate until maturity. With market-linked GICs, you can earn more interest if the stock market does well, but your initial investment will still be protected.
GIC Benefits
The most important benefit offered by this type of investment is security. Your initial cash amount will be protected. With fixed rate GICs you can also enjoy guaranteed growth and an easy way to project value at maturity. GICs are also known to offer excellent interest rates. Finally, GICs are usually fairly flexible investments. You can enjoy flexibility in the length of the term, as well as the frequency with which you receive payments.
If you live in Canada and are interested in investing your money in a secure instrument, a guaranteed investment certificate may be right for you. To learn more about what’s available in your area, visit your local bank.
