GICs

A guaranteed investment certificate (GIC) is a certificate of deposit at a bank or other financial institution for a fixed term, varying from six months to many years.

GICs are guaranteed by the financial institution that issues them and are insured by deposit insurance agencies, like the Canada Deposit Insurance Corporation (CDIC) or the Credit Union Deposit Insurance Corporation (CUDIC).

Types of GICs

There are two kinds of GICs: interest-bearing GICs and index-linked GICs. Interest-bearing GICs typically pay a higher fixed return than a savings account. They consistently pay returns over the course of the term. Index-linked GICs pay interest based on changes in a standard, such as a stock exchange index.

What Risks do They Have?

Interest-Bearing GICs

The primary risk of an interest-bearing GIC is that you may need the money before the term is up and have to pay a penalty or fee that will reduce your return, perhaps to zero. Another risk is that interest rates may rise while you hold a low rate GIC.

Index-Linked GICs

The greatest risk for index-linked GICs is that you may not earn a return if the markets do not rise during the term. These GICs are higher risk than interest-bearing GICs, because you don’t know your rate of return even though you know you will get back your principal.

Can You Sell Them Easily?

Interest-Bearing GICs

Usually not. Most GICs are designed to be held to maturity. GICs that allow you to redeem before maturity may charge a fee or impose a reduced interest rate. Some GICs let you access your money any time, but these pay very low rates of interest.

Index-Linked GICs

No. You will not be able to cash it in until the term expires.

What are the Costs?

There are no costs to buy and hold GICs, as long as you hold the GIC until it matures.

What are the Expected Rates of Return?

Interest-Bearing GICs

The rate of interest varies widely based on the term you choose and the institution selling the GIC. They pay interest on a regular basis.

Index-Linked GICs

These types of GICs pay interest based on changes in a market index.

Many index-linked GICs limit the amount you can earn.

  • Some have a maximum performance guarantee so that you receive a return only to the stated maximum regardless of how much the index went up.
  • Other index-linked GICs limit your participation to a percentage of the market’s return.