A GIC or Guaranteed Investment Certificate is a type of Canadian investment vehicle that works by having you deposit or loan the bank some of your money for a specified period of time that could be from six months to five years. In return, the bank or financial institution guarantees to return your money plus interest.
If you leave your money with them longer, they will pay you more money in interest on your GIC. When the specified term is up, they will pay you back the entire amount you deposited plus the interest. For many Canadians, this is a very safe and effective way to save some money in the short term.
A Guaranteed Investment Certificate is one of the safest Canadian investments you can make. There is very little risk, unlike the stock market or even rea estate, which can go up and down depending on market or local economic conditions. It’s close to a savings account, except that with a GIC is that you need to leave your money in the account for a specified period of time, or pay a penalty if you withdraw any of the money earlier than that. There are some requirements that govern this type of investment and there are variations that you should consider. Always get advice before making any investment with your hard-earned money.
2. Minimum investment
There is a minimum investment required for a GIC of at least $500. However, there are no fees like with other types of investments. They come in set terms starting at six months and are offered in yearly periods after that, up to a five-year maximum. Each term ends with the maturity date and that is when the interest is paid out. As noted earlier, the longer the term, the higher amount of interest is paid out at maturity.
3. Variable interest rates
There are also variable interest rates GICs. They work by paying out their interest on a monthly basis, once a year or on the maturity date. There are almost always penalties if you withdraw your money before maturity, but there are a few Guaranteed Investment Certificates that are called cashable or redeemable GICs. They still pay interest, but at a much lower rate than other GICs but they also do not charge a penalty if you need to take your money out early, before the maturity date.
4. Can you afford to have your money locked in for a term?
This type of investment won’t work if you need this money for regular living expenses. There’s no point of investing in a GIC unless you can live without that money for the full term of the GIC. Otherwise, you will only be frustrating yourself and end up paying penalties instead of receiving interest on your investment.
5. Do you want a fixed interest rate or a variable interest rate?
There are always options when it comes to GICs and most banks will offer you the choice of a fixed interest rate or a variable interest rate on your investment. The rates paid out on GICs are subject to market fluctuations. If you are a low risk investor, take the fixed rate and you will know exactly what your interest payments will be at maturity.
If you are a knowledgeable investor with the best GIC rates available, you might be a bit more daring and take a chance at getting an even higher payout at the end. Some people choose to use a combination of GICs that include ones with regular interest payments and others that mature at different times. That way there is always money coming back to spend or re-invest as you please.