A Guide to investing in GIC’s in Canada

A GIC is a Guaranteed Investment Certificate. GICs are funds you lend banks, trust companies, and credit unions money for a defined time frame and get a certain interest rate in return.  GIC’s are considered no-risk investments because they guarantee that you will receive your original investment in its entirety.  The interest rate of a GIC is based on the length of time you agree to lend them money and what the current interest rates are like at that time. So why is it wise to invest in a GIC? We will provide you with the advantages of pursuing a no-risk/low-risk investment.

What is GIC?

Because a GIC represents no risk, it means that you won’t lose any money in the long run. When you pull your investment or it is returned to you, you are guaranteed to have at least the amount of money that you started with, if not more than that. When you invest your money in a GIC, you are guaranteeing that you will lose nothing and you have the potential to gain quite a lot of money over time.

Why is GIC a Wise Investment?

GIC offers no risk and promises a considerable return in many cases. One Canadian company saw a growth of 30% over the course of three years. This means that if you had purchased a GIC for one thousand dollars and maintained your investment for those three years, you would withdraw a three hundred dollar increase (approximately, before taxation and other fees). In the above example, there may be applicable fees and notices that you should be aware of. If the previously mentioned GIC example had a limitation on the maximum return, you may not see that thirty percent growth. If the GIC had a maximum return limitation of 25%, then only two hundred and fifty dollars would be pulled rather than three hundred dollars (before taxes). It is a good idea to thoroughly read limitations regarding the return of your investment before investing in a GIC. A GIC is an excellent way to obtain minimal growth with virtually no risk. By investing in a GIC, you are guaranteeing that you will be receiving at least your original investment in addition to potentially significant growth. In spite of the fact that there is no risk, however, you should still be cautious when you put your money into a GIC. There are various limitations that could apply to your investment, so you should identify your maximum return and determine for yourself whether or not the investment is worth the time and money that it will require.

Advantages of Investing in GIC

Guaranteed Investment Certificates (GIC) are a viable and safe investment channel that can give you good rates of interest. It is ideal for investors that are looking to earn interest but also prefer the flexibility of a short-term option that allows them to encash the investment in a short while if needed. Read ahead for some detailed information about Guaranteed Investment Certificates and how they work:

Understanding GICs (Guaranteed Investment Certificates)

By investing your money in the Guaranteed Investment Certificate (GIC), you can be assured of good interest and a return of the initial amount you invested or the principal. You can make this investment in a bank or any other financial institution for the length of time or term that suits you best. These terms can range from as short as 30 days to as long as 10 years. Of course, the longer the term, the higher will be the amount of interest you earn. Although GICs may not earn you very high rates of interest, they do offer benefits such as:
  • Safe investment: You’ll have the assurance that you can get back the principal amount you invest without any possibility of losing your money. The investment is not subject to market fluctuations.
  • No volatility: By getting GICs, you can avoid the risk of volatility like in the case of stocks.

Types of GICs Available

What makes GICs an extremely attractive investment is that they are very versatile. You can choose the category that best suits your investments needs:
  • Basic Cashable GICs: These are great if you’re looking to earn a higher rate of interest than what your bank is giving you on your savings account.
  • RRSP GICs, RRSP’S GICs, TFSA GICs: Choose these categories if you would prefer to secure your money in a registered savings account.
  • S. Currency or Any other currency GICs: If you’re a frequent traveller, you could consider investing in GICs of the particular country where you travel.
  • Market-Linked GICs: This investment option is suitable for the investor who is open to some amount of risk.

Understanding CDIC

The Government of Canada offers assurance on the eligible deposits that investors make with the members of the Canadian Deposit Insurance Corporation (CDIC), a federal Crown Corporation. By investing in any of the CDIC member firms, you will get automatic insurance without the need to pay additional charges. You can learn more about CDIC insured GICs.

How to Get the Highest Returns Possible on GICs

If you’ve tried your hand investing in the stock exchange, it is understandable that you would prefer an investment option that is free of market fluctuations. And, if you’re investing your retirement money, you’ll want an avenue that keeps your money safe. Putting your money in the conventional Registered Retirement Savings Plan (RRSP) or any other savings plan is safe but not likely to earn you attractive rates of interest. What you need is an investment channel that keeps your money secure but also earns you adequate interest rates for the investment to make sense. Let’s begin by ticking off the traditional options you’re well aware of:
  • Canadian Savings Bonds (CSBs): Rates of interest available are just 0.5%, but the premium version may earn you up to 1% for the first year.
  • Five-Year GICs: Rates of interest offered by big banks may vary from 1.75% to 1.85%, each year.
  • Cashable GICs: Rates on interest is lower than five-year GICs but higher than the returns available on Canadian Savings Bonds.
  • Ally.ca, Canadian Tire Bank, and other such “virtual” financial institutions offer rates of interest higher than the returns offered on daily interest savings accounts.
Aside from these options, with some smart thinking, you can find other investment channels that are guaranteed, secure, and offer you attractive interest rates.

Search Online for Investment Options

When you’re ready to make an investment, your first thought is to approach the local bank and buy a GIC. Should you choose to buy a GIC at any of the major banks of Canada, you’ll find that the interest rates aren’t as competitive as what smaller institutions offer you. In addition to all these options, you can find other channels – simply by searching on the internet. You’ll find several websites that offer you comparative information on the available GICs and term deposit rates offered by organizations such as:
  • Various banks
  • Credit unions
  • Life insurance companies offering you Guaranteed Interest Annuities or GIAs
  • Trust companies
Among the reliable websites, you can look at are Cannex Financial Exchanges and CompareMyRates. Some websites also offer information on the best rates you can get in case you invest through a broker. Typically, these rates are not available to the general public investing through conventional channels.

Deposit Brokers and the Functions They Perform with GICs

You’re probably familiar with the term mortgage brokers. They are the agents who scout the market for the most economical mortgage interest rates for their clients. Deposit brokers are similar to mortgage brokers and can find you investment options that give you the best return on investment. Like, for instance, they’ll find you GICs and other guaranteed investment products with the highest interest rates. The best positive of working with these agents is that you won’t need to pay them any charges. That’s because of the financial institution you invest in pays their fees. When you’re ready to find a good broker, log onto the website of the Registered Deposit Brokers Association. This website will give you details of over 1,600 brokers and their affiliates in different regions of Canada. You can simply find and contact the agent operating in your area. These brokers can help you find the GICs, annuities, term deposits, and other guaranteed investment products that offer you the best rates of interest and other terms. Most such agents can get you interest rates that are a whole percentage point higher than the bank’s posted rates. Of course, this factor is dependent on the investment term and individual financial organization. Here’s an example. Say, you check with a retail bank at the physical location and they quote an interest rate of 1.85% per year on a five-year GIC. But, if you approach the same bank via a broker, you may be able to get rates of 2.7% each year for the same 5-year GIC. Brokers and agents typically have access to both major and smaller institutions that may provide better rates of interest. Smaller organizations can afford to pay these rates because they work with a more economical infrastructure as compared to the larger institutions.

Positives of Working with Brokers

You’ll find that working with an investment broker has several advantages:
  • Brokers may spread your money across various organizations with the most beneficial rates of interest and different terms so you’re assured of regular returns on investment. For instance, the broker may split your money into five sections and invest it in GICs with one-year, two-year, three-year, four-year, and five-year terms. On maturity, each of the GICs can be reinvested in new 5-year terms so you continue to get returns. As a partner at Conservative Investors Services in Toronto, Mary Rygiel says, “My policy is to recommend that clients ladder their investments. It gives them liquidity and helps as interest rates increase.”
  • Working with a broker provides you with the protection offered by the insurance limits of federal or provincial deposits. That’s because they spread the investments around different financial institutions.
  • You’re likely to get higher rates of interest than if you were to visit the bank on your own. Bill Ritchie is the CEO of GICdirect.com, an organization that has Canada’s major deposit brokers on board. He says, “The rates we can access are higher because it’s less expensive for the institution to issue those GICs through a broker than it is through the retail side of the operation.”

Downsides of Working with Brokers

The biggest downside of working with brokers is that many financial institutions don’t accept investments through agents. If you’re looking to invest with them, you may have to approach them personally. Like, for instance, Royal Bank of Canada, various other smaller banks that operate online, and credit unions. Such organizations may offer you higher rates of interest because they aren’t paying any fees to the brokers. For this reason, say, you’re looking for investment products that give you high-interest yields for the funds you own in RRIF, RRSP, TFSA or non-registered accounts. Accordingly, you might want to choose these organizations even if you must contact them on your own.

Investing in Stocks and Bonds as an Option

You also have the choice of investing in a portfolio that includes high-grade corporate bonds and preferred shares. However, you’ll have to be prepared to deal with the risk that accompanies this investment option. President of the Registered Deposit Brokers Association, Brian Smith opines, “Baby boomers are at a point in their life where they’re retired or heading into retirement. With the [market] volatility we’ve seen over the last few years, many people want guarantees because they say they can’t afford to gamble with their retirement.”

Do Your Homework When Choosing the Best GIC in Canada

Before you make the final decision on the best GIC to invest in, keep these considerations in mind:
  • Are interest payments credited once a month or year?
  • Is the interest compounded each day or at the end of the year?
  • Is there a minimum limit on the deposit amount? Some organizations accept investments of even $500. However, you might get higher rates of interest on larger deposits.
  • Can you encash the GIC ahead of the end of the term? Keep in mind that flexible GICs provide a lower rate of interest.
  • If you’re working with a broker who is a member of the RDBA, you’ll likely have access only to those investment products that carry federal or provincial guarantees. Federal (CDIC) offer insurance of up to $100,000 per account while provincial limits may be variable.
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