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Budget Investment Saving

Many Canadians have invested hard earned money into stocks and other volatile forms of investments. While such investments can produce significant gains in a short amount of time, they can also result in sudden and crippling loses. Although there is a time and place for high-risk investing, your portfolio should also be balanced by more secure forms of investments.  If you are are interested in investing money but have reservations about losing your hard earned cash due to market fluctuations, a GIC may be the right investment option for you.

What is a GIC?

GIC is an acronym for “Guaranteed Investment Certificate”. When you invest in a GIC, you are guaranteed to keep your investment plus you will be earning interest on your money. Essentially, when you purchase a Guaranteed Investment Certificate, you are lending the bank your money for an agreed upon amount of time. GICs boast security since the principal investment is guaranteed.  The principal amount is not at risk, unless the bank defaults. Historically, GICs were  rigid investment options that did not allow investors to cash out.  Newer Guaranteed Investment Certificates offer more features including some that allow cash out. The verity of GICs currently available offers many options to fit an investors specific goals within the investors desired time frame.   Guaranteed Investment Certificates (GICs) are safe and versatile investment options for people who are looking for short term investment options, such as a down payment on a car or paying taxes.  A GIC would not be beneficial for someone who is interested in a long-term investment, such as retirement, due to their low rate of return. Conveniently, most financial institutions offer them for purchase.  Some GICs can even be purchased for as low as $500.  However, the more you invest the larger your return will be so it is advisable to purchase a larger GIC.

Different Types of GICs

There are several types of Guaranteed Investment Certificates. Some, such as cashable GICs, give you the option to earn interest but you can still have access to your money. Cashable GICs are one-year term investments that can be cashed any time after 30 days without a penalty. If you should choose not to cash out your money, this form of GIC can be renewed automatically on the maturity date.  The minimum investment for a cashable GIC is $1,000 for a term of 1 year.  Current interest rates are around 0.1500% . Another option is the non-redeemable GICs, which do not offer you access to your funds but instead boast a higher rate of return. Non-redeemable Guaranteed Investment Certificates allow investors to choose from terms that range from 30 days to 10 years. Based on the specific non-redeemable GIC you choose, interest rates fluctuate between 0.650% and 1.7500%. The Accelerated Rate GIC offers an annal interest rate that increases every year.  Additionally, this 5 year GIC allows investors the option to reinvest their money on the 3 or 4 year anniversary of GIC purchase.  This allows investors to benefit from an increased interest rate if rates are rising.  If interest rates decline or stay the same investors can continue to earn their progressively rising rates. Index-linked Guaranteed Investment Certificates offer you the option of investing your money in the Canadian and global stock market. Additionally, market linked GICs can offer higher rates of return based on market performance. All forms of Guaranteed Investment Certificates are available as part of an RRSP, RRIF, RESP, TFSA or Non-Registered portfolio.

Security and Peace of Mind

Although GICs grow at a rate that is comparatively slower to some other forms of investments, such as stocks, Guaranteed Investment Certificates s are much less vulnerable to market fluctuations and are therefore much more secure forms of investment. This means that essential funds that you have set aside for your goals can grow without risk. Various forms of Guaranteed Return GICs offer a set interest rate so that you do not need to worry about changes in the markets or broad economy. By choosing from an array of Guaranteed Return GICs, you are likely to find a GIC that that can be can grow, mature, or be withdrawn from within a time that meets your specific needs.

Laddering Strategy

Like other certificate forms of investment, the longer you hold an investment in a GIC, the greater your potential is for higher returns. This principle is fundamental to investing and also holds true for GICs. In most cases, GICs with longer terms of maturity pay a higher interest rate. But, as you consider your options with Guaranteed Investment Certificates, don’t forget that choosing a longer term locks your money in at a fixed rate. If rates rise over time, you are likely to miss an opportunity to earn at higher rates of interest. A strategy often used, known as laddering, can minimize the influences of interest rate fluctuations while maximizing your GIC returns. Essentially, laddering involves staggering the maturity dates of your GICs so that only a designated portion of your money is locked in at a set interest rate. Below the steps for initiating and maintain the ladder strategy to GICs are described. To initiate the ladder strategy divide the funds that you intend to invest with GICs into equal portions in a combination of GICs with maturity dates ranging from one to five years. Each year, one of the GICs should be set to mature, and the funds from that maturity should be used to purchase a new five-year GIC. Each new five-year GIC purchase is intended to perpetuate you GIC investments, while at the same time providing you with the opportunity to adjust interest rates so that they are competitive and most able to maximize your investments.  If interest rates rise, you can take advantage of the higher rate by reinvesting the money from the Guaranteed Investment Certificate that matured at that time. Or, if rates fall, a large portion of your invested funds will still continue to benefit from the comparatively higher rates that you previously established.  Another key benefit of laddering is that you have scheduled access to some of your money every year. If required, you can reallocate funds to meet needs without cash out penalties. The laddering strategy can be applied with relatively large or small amounts of money, and it does not require a significant amount of maintenance or stressful calculations. While any type of person can utilize the ladder strategy, it is widely considered to be most beneficial to individuals who need stable cash flow from a secure asset, as well as for investors who want to maximize their potential GIC returns without locking in all of their money for a long term.

How to make GICs work for  you

As mentioned earlier most financial institutions sell the various forms of Guaranteed Investment Certificates and it is relatively easy to purchase them.  The downside to purchasing a GIC from your local bank is that they often do not offer the best interest rates.  The larger banking corporations in Canada offer rates which often are smaller than that of smaller institutions.  However, there are ways to get better interest rates.  There are a plethora of websites available which allow you to compare GIC and term deposit rates  between banks, credit unions, trust companies and life insurance companies.  For example, Cannex Financial Exchanges lists rates from over 60 different institutions on its site.  Comparing interest rates does not have the same convenience that walking into your local bank and making a quick purchase does, but it offers you the ability to find a better interest rate, which will make you more money over time.   If you are coming up with more questions than answers from your web search it may be beneficial to look into the rates and services that deposit brokers can offer .  Deposit brokers are much like mortgage brokers only they do not shop the market for the best housing prices.  Deposit brokers find the highest rates on GICs and other similiarly guaranteed products.  Conveniently for the investor the deposit broker’s fees are paid y the financial institution so there is no up front cost to the client.  Brokers often boast that they can beat the big banks’ interest rates by a full percentage point.  When looking for a broker, check out the Registered Deposit Brokers Association at rdba.ca.  They were formerly known asThe Federation of Canadian Independent Deposit Brokers (FCIDB).  The RDBA represents nearly 2,000 brokers and affiliates across the country.

The Downside to GICS

While Guaranteed Investment Certificates are a safe and secure way to invest money they do also have their downfalls.  Unfortunately, since GICS have a relatively low return rate, they may not keep up with the pace of inflation.  Also, some GICs charge a penalty if you need access to your funds and cash out early.  The interest that you earn on a Guaranteed Investment Certificate is also fully taxed if you do not have it held in a registered plan.