What are “Guaranteed Investment Certificates” (GICs)?
Guaranteed Investment Certificates, as the name suggests, are guaranteed investments monitored and enforced by Canadian Financial Institutions. It provides a guaranteed rate of return after a pre-determined period has passed. In addition, the institution guarantees the investor to receive the principal plus the promised interest rate at the maturity date of the GIC, except when the GIC is linked to stock market performance. GICs are offered in a variety of terms to maturity.
How does it work?
GICs create a contract between the borrower (financial institution) and you (investor). According to the contract, the financial institution agrees to pay you a certain interest on the money borrowed once the term is finished.
Advantages and Disadvantages of GICs:
Advantages:
Guaranteed return of principal and interest as stated in the contract;
There are varieties of products available to choose from;
As little as $500 can be invested;
Convenient, easy to understand, and easy to buy;
No extra fee.
Disadvantages:
The rate of return is low;
The GIC investor faces interest rate risk and inflation risk
Significant penalties are charged if the amount is withdrawn before maturity (contract period).
The investor will be taxed on the interest if the GIC is held outside a registered account.
There are different types of GICs with distinctive characteristics:
Fixed-interest GICs
Cashable/Redeemable GICs
Escalating GICs
Variable-interest GICs
Market-linked GICs
Foreign Currency GICs
Insurance GICs GICs are known to be one of the safest investment options as the financial institution that sells them is legally obliged to pay back the investor the interest and principal amount. The investor's risk is zero even if the bank fails. The Investors are insured for up to $100,000 by Canadian Deposit Insurance Corporation (GDIC).
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