This article is for informational purposes only, and not intended for any legal or financial advice.
There are a variety of decisions to make when deciding on what type of Guaranteed Investment Certificate (GIC) to invest your money in. GICs are secure investments that protect both the principal you invest, as well as the interest rate that is given at the beginning of your term.
In fact, GICs are backed by the Canadian Deposit Insurance Corporation, like other deposit products offered by banks and other financial institutions, so they are as secure as possible. For this reason, GICs are a popular part of many investor’s portfolios. They tend to offset riskier investments that may fluctuate over time. GICs offer investors peace of mind while also earning more interest than the average savings account.
When investing in a GIC, you must choose your term length, which can be anywhere from one month to several years. You can choose to have a cashable or redeemable GIC, so accessible at any time, or a non-redeemable GIC which is locked in for a specified period. Normally the reason you are saving will determine what type of GIC and what term you wish to invest in. Most often, GICs that are longer-term and non-redeemable offer a higher interest rate because you are effectively handing over your money to the bank for a longer period. The bank or financial institution can then make use of your money to lend it to other customers at an interest rate higher than what they are paying you.
Another choice available to investors when it comes to GICs is whether to hold a GIC in a registered or non-registered account. Registered accounts like RRSPs, TFSAs and RIFs have distinct advantages when it comes to tax savings and deferrals, but non-registered accounts may be easier to access.
How is interest paid on your GIC?
Yet another option with GICs is how to receive interest payouts that you make during the term of your GIC. Interest can be paid monthly, semi-annually, annually, when the GIC matures or at a predetermined anniversary date (i.e. two years). It’s important to understand how interest will be paid and how it is calculated when you are investing in a GIC.
For instance, one GIC contract may compound interest daily but pay it out monthly or semi-annually. Another type may only compound interest annually and pay it out when your GIC matures. It’s important to understand how the interest payout works on the GIC you are purchasing before completing the purchase. By studying your options, you will know how the interest is compounded and how it is paid. Does this make sense for you and your overall investment plan? Will it be compounded favorably for you so that you receive the best payout on your investment over its term?
Some banks or financial institutions will allow you to choose your interest payout, often after a certain term period, and some may not. That is why it is important to understand all the terms of your GIC before purchasing.