Guaranteed Investment  Certificates

If you’re looking to invest but don’t want to take on much risk, then Guaranteed Investment Certificates (GICs) could be a good fit for you. This type of investment product has been popular with Canadians for decades since it provides guaranteed returns. Though the returns you get may not help you reach your goals.

If you’re planning to invest in one, knowing how GICs work is crucial to understanding how they might fit into your overall financial strategy.

Variable-rate GICs

Variable-rate GICs have interest rates that can fluctuate during the term. This can benefit you if interest rates go up, but it works against you if rates drop. The interest rate determines from the financial institution’s prime rate and can change at any time. If the markets perform well, you’ll get more. However, if markets drop, you may not get anything at all. On a positive note, your principal still guarantees, so you can’t lose money — you’ll still get your original deposit back at the end of the term.

How Does a Guaranteed Investment Certificate Work?

You are probably wondering how GICs work. Well, the certificate is simply a loan that investors give to a bank or an authorized financial institution. The bank will then pledge to repay the invested capital on a particular date in future. A lot of factors influence the rate of return on a GIC including the length of the term and other interests outlined by the Bank of Canada.

Guaranteed Investment Certificate Example:

For example, a Canadian Guaranteed Investment Certificate generally has a maturity of from one to ten years and has a lower rate of return than other types of investments such as mutual funds, stocks or bonds. Typically a minimum deposit of $500 requires for a Guaranteed Investment Certificate in Canada. And interest pays generally either monthly, quarterly or annually, with some Guaranteed Investment Certificates paying compounded interest at maturity. Many Guaranteed Investment Certificates will not pay interest in the case of early withdrawal and some of them even charge a fee for early withdrawals. Guaranteed Investment Certificates usually offer lower returns than investing in the stock market. Canadian Guaranteed Investment Certificates currently have interest rates below two per cent per year.