What Are Gics? Guarantee Investment Certificates Explained

ByDan Kent Published On:

Fixed-income investments like GICs have become extremely popular due to rising interest rates. We’re witnessing some of the best GIC rates in the last twenty-plus years.

Prior to the COVID-19 pandemic and even during the low-rate environment we were in during the pandemic, many investors either completely ignored or didn’t even know what a Guaranteed Investment Certificate was. 

Now, they’re an important tool to mitigate risk, provide income, or simply earn some interest on a short-term savings goal.

What is a Guaranteed Investment Certificate?

A Guaranteed Investment Certificate, commonly known as a GIC, is a type of Canadian investment that offers a low-risk way to grow capital.

When an individual purchases a GIC, they are lending money to a financial institution like a bank or a credit union. In return, the financial institution guarantees the return of the principal amount plus interest at a specified rate. The agreed-upon interest can be fixed or variable, depending on the terms of the GIC.

A lot of the time, investors utilize GICs as a portfolio diversification tool to complement their stock, ETF, or mutual fund portfolio. However, many may utilize it to earn some money on their short-term savings as well.

How do you make money with a GIC?

You will make money on a GIC by earning the predetermined rate of interest offered by the bank on the GIC. For example, if you invest in a 1-year GIC at 5% interest, you will earn 5% on that investment over the course of the year, and when the year runs out, the GIC matures, and you get your initial capital back.

If the GIC is multiple years in length, there are a wide variety of methods in terms of payment. An investor could choose to receive their interest monthly, semi-annually, or annually, or could even opt to choose for it to compound annually, in which the bank will keep the money, and you will begin to earn interest on your interest.

Interest can be earned through either a fixed rate or a variable rate GIC. A fixed-rate GIC provides a consistent interest rate over the term, whereas a variable-rate GIC has an interest rate that can fluctuate with the prime rate.

What does the term mean with a GIC?

The funds invested in a GIC are locked in for a predetermined period of time ranging from as short as 30 days to as long as 10 years. This is what they call the term of the GIC.

Generally, the longer the term of the GIC, the higher the interest rate offered. However, there are some rare circumstances where banks will offer more attractive short-term GIC rates if they believe rates will be coming down in the future.

Is a GIC a high-risk or low-risk investment?

GICs are considered a conservative investment choice, particularly appealing to risk-averse individuals looking for stable growth without exposure to market fluctuations. 

They’re some of the safest investments you can buy, right up there with treasury bills, which are guaranteed investments issued by the government.

Another aspect drawing risk-averse investors into GICs is the fact they’re CDIC insured, meaning even if the institution you have the GIC with goes bankrupt, your money is insured up to $100,000.

Is it possible to lose money in a GIC?

Investing in a GIC typically does not result in a loss of principal, except in the situation you invest with a bank that is not a CDIC member or you have more than $100,000 invested in a single GIC at an institution that goes bankrupt.

However, some GICs, like Equity-Linked GICs (I’ll talk about these later), may not guarantee a return if the linked market index performs poorly, potentially leading to no earned interest. 

Moreover, early withdrawal from non-redeemable GICs in the case of financial hardship might affect the overall return, but you still wouldn’t lose any of your principal.

What is the difference Between a CD and a GIC?

A Certificate of Deposit (CD) is similar to a GIC but is typically used in the United States, while GICs are Canadian instruments. Both offer guaranteed returns over a fixed period, but they may differ in terms of interest rates, terms, insurance, and penalties for early withdrawal.

Different types of GICs

Non-Redeemable GICs

Non-redeemable GICs are ideal for those who can afford to lock in their money for the full term, offering attractive interest rates. 

The key advantage is the potential for the highest returns among GIC types, along with diverse term options. 

However, the downside is the complete lack of liquidity and the increased risk due to being locked in, making them vulnerable to interest rate and inflation fluctuations. 

Pros:

  • Higher interest rates.
  • Variety of term lengths.

Cons:

  • No liquidity.
  • Higher risk due to interest rate/inflation fluctuations.

Redeemable GICs

Offering a blend of security and accessibility, redeemable or cashable GICs allow investors the option to withdraw funds before maturity, which is handy in emergencies. 

The primary benefits include the security of the principal amount, a guaranteed return rate, and the flexibility for early withdrawal. 

The trade-offs, however, are significantly lower returns compared to non-redeemable options and potential fees or penalties upon early cash-out. 

The one thing I always say is that the only people who really benefit from redeemable and cashable GICs are the banks. I’d simply choose non-redeemable GICs and make sure I don’t need the capital until it matures, even in an emergency.

Pros:

  • Access to funds before maturity.
  • Guaranteed principal.
  • Guaranteed rate of return.

Cons:

  • Lower rates of return compared to non-redeemable GICs.
  • Potential penalties and fees for early withdrawal.

Registered GICs

Somewhat perplexing, these GICs aren’t different in structure but are named for the account you hold them in RRSPs, RRIFs, TFSAs, or any other tax-sheltered account. If you own a GIC in an unregistered account like a cash or margin account, it would be called a non-registered GIC.

Comparing registered and non-registered GICs we can learn more about tax-free growth potential. But it’s worth noting that there might be other tax-free investment options that could yield higher long-term returns.

Pros:

  • Tax-free growth in accounts like RRSPs, RRIFs, or TFSAs.

Cons:

  • Other tax-free investments may offer higher long-term returns.

Market-Linked GICs

Market, also called equity-linked GICs, are for those seeking a balance between risk and security. 

Your principal is still guaranteed, but your returns are tied to market indices, like the S&P/TSX Composite Index, offering the chance for higher returns while still safeguarding the principal. 

The advantages include potentially higher returns if the market soars and guaranteed principal safety if it dips. 

However, they lack liquidity and often come with capped participation rates, meaning if the market surges beyond a certain point, additional gains are not passed to the investor. 

Pros:

  • Potential for higher returns if the market performs well.
  • Principal protection if the market declines.

Cons:

  • Lack of liquidity.
  • Capped participation rates, limiting maximum returns.

Choosing the right GIC

Choosing the right GIC from the list above is heavily dependent on the individual’s needs. 

In my opinion, investors are best to be buying non-redeemable GICs with money they have no plans to use and won’t need to use in the event of an emergency. This is primarily due to the fact that the other types of GICs are structured to mainly benefit the banks, not the investors.

However, that doesn’t mean you can’t explore all the options. Here are some key factors in choosing the GIC that is right for you.

  • Interest Rates: Seek out competitive rates among many banks and even potentially negotiate rates with your institution. Most of the time, online banks will offer more attractive rates due to being able to operate at lower spreads. However, this isn’t always the case.
  • Term Length: If you do not require immediate access to your funds, longer-term GICs generally offer higher interest rates. You can also utilize a GIC laddering strategy to stagger maturities and unlock a bit of liquidity.
  • Access to Funds: Some GICs offer the option to cash out before the maturity date. However, as I’ve mentioned, this may come with a penalty or lower interest rates.
  • Market-linked, variable rate, or fixed rate: There are multiple options on this front. Market-linked GICs run the risk of earning nothing in the event of a market drawdown, while fixed-rate GICs will provide you with a guaranteed return. Variable rate, on the other hand, will fluctuate depending on the Bank of Canada’s movement in policy rates.

What are the pros and cons of GICs?

The main benefits of a GIC

Guaranteed return: Investors are drawn to GICs because of the guaranteed interest rates, ensuring that their principal amount will be returned, and they’ll also be rewarded for loaning the money to the bank.

This makes GICs a safe haven, especially during periods of economic volatility. Of note, equity-linked GICs, depending on their structure, do not guarantee a return, just the principal.

Stability and security: GICs offer a high level of security, as they are typically backed by financial institutions and are insured up to $100,000 by the Canada Deposit Insurance Corporation (CDIC). This security is a cornerstone of GICs, putting them up there with government-issued bonds in terms of safety. During a time of high interest rates, more people start to wonder, are GICs worth it right now?

Potential market exposure: Some GICs offer the potential for higher returns through market-linked options. These market-linked GICs provide exposure to stock markets, which may yield higher returns than regular GICs, depending on market performance.

The main downfalls of a GIC

Lack of liquidity: GICs often require investors to lock in their money for a set term, which can range from a few months to several years. This lack of flexibility means that investors do not have access to their funds during the term, which could be inconvenient if they require liquidity.

There are rare instances where you can pull your money out, but it requires proving significant financial hardship.

Interest Rates and Inflation: While GICs offer a stable return, the interest rates are usually lower than returns potentially available through other investments. In addition to this, in an environment with rising inflation, the interest earned may not keep pace, leading to a loss of purchasing power over time. This is often called negative “real returns.”

High taxes: Unless you’re buying a GIC in an RRSP, TSFA, or other tax-sheltered investment account, you’re going to be paying a high rate of tax. That is because interest income, the income that is generated from a GIC, is one of the worst forms of investment income you can earn. You’re typically charged 100% of your nominal tax rate.

Potential for Lower Returns: Although market-linked GICs can offer a higher return potential, the return is capped, and investors may not reap all the rewards of a high-performing market. I’d call this the opportunity cost of investing in GICs.

Over the long term, the stock market has proven to provide higher returns than fixed-income investments like GICs, especially in tax-sheltered accounts like the Tax-Free Savings Account or Registered Retirement Savings Plan.

How to buy a GIC

To invest in a GIC, investors typically approach a financial institution where they have the option to select from a range of terms, generally spanning from 30 days to a duration of 10 years. 

Minimum investment amounts vary, but many institutions allow individuals to start with sums as modest as $500.

If you’re buying a GIC with the institution you bank with, it can be as easy as getting a hold of them and telling them you’d like to buy a GIC. In some situations, you may not even need to contact them; you can buy it online.

If you’re finding that alternative banks are offering better rates, you can do a couple of things. First, you could go to your institution and negotiate a better rate. Another thing you can do is simply open up an account with the institution you’d like to buy the GIC with.

In this day and age, it takes just a few minutes to open up or transfer an account with a new institution.

Investors are advised to ensure their GICs are eligible for protection by the Canada Deposit Insurance Corporation (CDIC). One of the first things you need to do when looking to buy a GIC at a particular bank is to see if they’re a CDIC member.