For those of you who are not sure what a GIC (Guaranteed Investment Certificate) is, it is an investment, one which guarantees a rate of return over a specific period of time. They are normally offered by Canadian banks and trust companies. It is generally a low risk, so the returns tend to also be lower than other forms of investment, such as bonds, stocks and mutual funds.
Normally, your initial amount invested is not at risk, so you never lose that money, so it is pretty safe. Let’s take a closer look at some of the different types of GICs available to Canadians.
1. Fixed & Variable Rate
If you sign up for a one-year term for a fixed rate GIC, you can pretty much tell how much you will make at the end of that term. This is because the interest rate in this period will not change. As an example, suppose you invested $1,000 in a one-year fixed GIC with 2 percent interest, then, at the end of this period, when the term ends or matures, your $1,000 will now be $1,020. It is beneficial to have the best GIC rates to maximize your investment returns.
In a variable rate GIC, the interest rate can change during the period you have invested it for, as this depends on how well the stock market is doing. At the end of the term, you have no idea how much you will get back though. The interest rate is higher than a fixed rate GIC but it is also a greater risk. The good thing about both these methods is that your initial principal is still intact or secure, so you can at least get back that full amount.
2. Registered & Non-Registered
Registered GICs can bring in some benefits like tax-sheltered savings plans that is government-approved. These include RRSPs (Registered Retirement Savings Plans), RESPs (Registered Education Savings Plans) and TFSAs (Tax-Free Savings Accounts). A registered GIC may be held in any of these.
A non-registered GIC is not registered with the government, so whatever interest is gained must be claimed as taxable income.
3. Redeemable & Non-Redeemable
A redeemable GIC is also known as a cashable GIC. This type of GIC allows you to take your money even before the term is up and there will not be a penalty in doing so. A non-redeemable GIC on the other hand will charge a fee or penalty if you withdraw it earlier. You will also have to forfeit any interest you have earned.
4. Short-term & Long-term
A short-term GIC may be for a term that is less than a year whereas a long-term GIC can be from a year or even ten years. In general, a short-term GIC will have a lower interest rate.
5. Market-Linked GICs
This kind of GIC is more risky and in essence is a combination of part GIC and part stock market investment. In general, they are also non-redeemable.
6. Foreign Currency GIC
Some banks will allow you to invest in GICs in a foreign currency, for example, in U.S. dollars, so the interest earned will also be in that currency. U.S. dollars are accepted all over the world and investing with it can pay off in the event the Canadian dollar drops.
Before investing, take a look at your situation and what may happen in your life in the foreseeable future. Can you commit long-term? Might you need to withdraw before a term is up? Look at every angle before you make an investment.