Finance basics: What is a GIC and why should you invest in one?

Are you looking for a safe place to invest your money? You might want to consider a Guaranteed Investment Certificate (GIC).

If you have shorter-term goals like buying a new vehicle or taking a family vacation, GICs are an ideal place to put your hard-earned savings. However, GICs can also be a good way to save toward long-term goals like the down payment for a home.

Here are the basics of GICs and why you might consider adding them to your investment portfolio.

What is a GIC?

A GIC is a secure investment sold by Canadian financial institutions that work similarly to a savings account. As an investor, you buy a GIC that deposits money in your bank account for a fixed length of time, and that money will be 100% guaranteed to earn interest over the term of your investment.
There are no such guarantees with other types of investments, meaning you might not earn much of a return.

GICs are a great option if you’re seeking predictable and guaranteed interest growth. Financial institutions guarantee the return, even if there is a disruption with other investments or a downturn in the economy.

With GICs, you can also take advantage of flexible investment term lengths (as short as 30 days and up to 5 years. (You don’t need to lock in your money for decades to see a return.) You also benefit from competitive interest rates that are guaranteed for the full term of your investment.

In short, you’ll earn interest on any money that you invest. Usually, the longer your GIC term (the length of the GIC), the higher the interest rate.

Reasons to invest in a GIC

If you’re looking for a steady return, GICs are worth considering. Since a GIC is a guaranteed investment certificate, you can relax knowing you have minimal risk with this smart investment. In fact, this is one of the safest investments for Canadians.

To get started, you may be able to invest in a GIC for as little as a couple of hundred dollars. So whether you’re saving for something specific like a vacation or you’d simply like to keep your money in a safe place (out of sight, out of mind), a GIC can be a great investment option.

Are GICs risky?

Unlike a mutual fund or a stock, when you invest in a GIC there’s very little risk. This is another major benefit. You don’t need to be concerned about losing your initial deposit since the money you invest is protected and guaranteed by the Deposit Guarantee Corporation (DGC), which covers credit union deposits 100% without limit.

What is a GIC ladder?

GIC laddering is a great way to maximize your GIC return over a number of years by spreading out the impact of rate changes. For example, in year one you may invest at a certain rate, but in year two that rate could go up or down—likewise in year three and on. By building a GIC ladder strategy, you can further spread out the already minimal investment risk of GICs, and you aren’t locking in all of your money at once.

For example, instead of investing $5,000 in one GIC for a five-year term, you could invest $1,000 in five different accounts, each with a different length term. You could have accounts with terms for one-year, two-years, three-years, and so on. By not putting all your GIC eggs in one basket (term), you can reduce your risk without having all your money locked up for the entire five years.

Is there a downside to GICs?

Although GICs carry a lower level of risk, they tend to offer a smaller investment return compared to mutual funds and stocks over time.

And if there’s a chance you might have to withdraw your money before the end of the term, a GIC may not be for you since you may be required to pay back all or some of the interest. However, if you stay invested until the end of the term, not only will you get back your initial deposit, but you’ll also earn interest. (Keep reading to learn how to create more flexibility with multiple GIC accounts.)

Will I get taxed on my investment?

Yes, the income you earn on GICs is interest income, and this will be taxed at your marginal tax rate (the tax rate on your last dollar of income). If you’re holding a GIC in a non-registered account, don’t forget to factor in taxes when calculating the rate of return on your GICs.

How do I open a GIC?

Opening a GIC is a relatively easy process and your advisor can help you set up an account. You can also hold GICs inside Registered Retirement Savings Plans and Tax-Free Savings Accounts, which both offer you some additional benefits.

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To open a GIC, set up an appointment with your ACU Advisor today by booking time through the digital appointment booking tool.

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