Investing in Guaranteed Investment Certificates (GICs) in Canada is one of the most popular methods of savings and investment vehicles used amongst individuals. GICs offer higher return rates than what many of the biggest Canadian companies are paying out as dividend, yet do not come with the inherent risk associated with individual share ownership. Currently, the interest rates on GICs range from 1.8% to 3.3% (as of May 2020) with some banks and trust companies from time to time putting up promotions of higher rates of up to 4.45%. Though these rates offer much better returns on investments when compared to the returns of individual share ownership of any of the large Canadian companies, there are a few factors to consider before deciding to invest in GICs.
When deciding to put in money into a GIC, the first thing to consider is the length of term of the investment. Usually, the longer the term, the higher the interest rate that most banks or trust companies offer, as the interest rate is meant to compensate for the investor’s willingness to tie up their money for a longer period of time. If the investor wants to withdraw from their GIC before the completion of the term, they incur significant penalty fees. Sometimes, the loss of the penalty interest can offset the amount of returns the investor expect to make from their investment in the long run if they decided to withdraw prematurely from the agreement.
In addition to considering the offering terms of the GIC, the investors must also consider the financial security of the institution where they are investing in. When buying a GIC, or any other form of deposit account product for that matter, Canadian investors are allowed up to $100,000 of insurance under the government provincially and federally, provided that the institution where the deposit is made is a member of the Canadian Investor Protection fund or similar. Other than that, no individual GIC out there will secure an investor up to the amount of $100,000 if the bank or trust company where the GIC is purchased became insolvent. Hence, prudent consideration must be given to any and all institutional partners before carrying out GIC transactions to avoid losses should the partner fail.
Similar to investing in individual shares, potential investors in GICs must also perform adequate due diligence into the relative rate of return versus the current market rate of return as offered by other competing financial institutions. At certain times, some of these competitors’ deals may be too good to be true, but can often be higher than what agreements of longer terms would yield. Oscar Wilde’s quote “Nothing is certain except for death and taxes” can aptly be applied here. Hence, a thorough comparative analysis of different GIC offerings should always be conducted before one decides to commit his or her money.
Finally, coupling a GIC investment portfolio with a diversified stock and bond portfolio can increase return-on-investments without exposing the investor to too much risk. This allows investors to consolidate their investments with GICs, but still have the option of diversifying across multiple asset classes. GICs can also provide liquidity since they can be surrendered for a different term to a different institution or rolled over to another GIC and capital gains taxes are reduced or eliminated due to the tax deferral of GICs.
In closing, GICs have long been used as a reliable savings and investment products for Canadians and can provide higher return rates on investments. While GICs are not as complex as individual shares, it is important to ensure that due diligence is done to achieve the highest return possible relative to the market and the security of the institution offering the GIC is reviewed. Lastly, considering GICs as part of a diversified portfolio could increase returns without too much associated risk.