TLDR:
- A Guaranteed Investment Certificate (GIC) is a secure, low-risk investment that guarantees 100% of your principal, while earning interest
- With a GIC, you put money away for a set term and earn interest that’s fixed, variable or based on the product’s features
- Some GICs offer the flexibility of redeeming them at any time, while others have strict rules on when you can withdraw the funds without penalty
- When investing in a GIC, it’s important to choose the type and term based on your goals and time horizon
This article was originally published by RBC Discover & Learn on September 27, 2022.
GICs guarantee your principal and pay interest
What is a GIC? The name largely says it all. A Guaranteed Investment Certificate (GIC) is a secure investment that guarantees 100 per cent of your original investment, while also earning interest.
With a GIC, you can put money away for a set term – ranging from one day to several years – and earn interest that’s fixed, variable or based on the product’s specific features. Typically, longer terms come with higher interest rates.
The risk associated with investing in a GIC is low. In addition to guaranteeing your original investment, GICs come with the benefit of being insured by the Canadian Deposit Insurance Corporation (CDIC), a government agency that insures up to $100,000 of your GICs at each financial institution.
There are different types of GICs to choose from
Most GICs require that your money be locked in for an agreed-upon term, though some allow for more flexibility to access your money when you need it.
Non-redeemable GICs generally offer higher rates, but with these products, you can’t withdraw the money until after the maturity date. Redeemable and cashable GICs, on the other hand, give you the freedom to access the funds if you wish. They normally have lower rates as a tradeoff for the flexibility to redeem when you want.
Generally, the longer you stay invested, the higher the rate. For example, a two-year term might come with an annual interest rate of three per cent while a three-year term might offer an annual interest rate of four per cent.
There are also equity-linked GICs, which offer the security of a GIC and the higher return potential of an equity investment. Returns are tied to the performance of an underlying index or basket of selected stocks.
Your time horizon should guide your choice
Given the time commitment associated with GICs, it’s important to consider when you’ll need to access the money you’re investing. Are you planning on attending graduate school? Saving for a down payment towards your first home? Setting up an emergency fund to cover unexpected expenses? These are important questions to ask yourself when determining what term and type of GIC might be right for you. Figuring out your financial goals — including when you might need the cash to fund them — will be a key factor in choosing a GIC.
For example, if you anticipate a large spending need in the short term, redeemable GICs may offer you the security and flexibility you need. Long-term goals may mean you’re more comfortable locking in for longer, fixed terms.
Market conditions affect when GICs make sense
While GIC rates are influenced by the Bank of Canada’s interest rate decisions, they are more closely tied to the bond market. When there is an expectation of higher interest rates, bond rates – and in turn GIC rates – tend to rise. And, when the stock and bond markets are unsteady, GICs offer a level of stability.
If you’re looking to grow your money without worrying about potential losses, a GIC may be the right choice for you. For more financial advice, talk to one of our dedicated RBC Healthcare Specialists.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
