Guaranteed investment certificates (GICs) are an investment made by a person to a financial institution. At the end of term, the investor receives their principal investment back as well as any interest earned. Here are 5 reasons to invest in GICs as opposed to other options such as stocks or bonds.
1. Low risk
Purchasing stocks and bonds have the potential to provide higher returns. However, there is an ever-present risk that you will lose money if they do not do well. As a result, if you want a return that is more certain, you should invest in a GIC.
It is no secret that GICs tend to offer a lower return than other investment options. However, unlike stocks or bonds you will not lose money. This means that the risk you take by investing in GICs is lower. GICs are ideal for people looking for a low risk investment with no chance of costing them money that will still provide some reward, allowing them to reach their financial goals whether they be short or long-term.
While other investment options can provide the investor with great returns, these depend on the market. Therefore, at the same time they can cost the investor to lose money with no returns being a sure thing.
GICs are a popular investment option because they are guaranteed. At the end of term, in addition to your original investment amount, you are also entitled to receive any interest that has accrued. When you agree to the investment, you will know what the interest rate is and how much you can expect based on the amount you invested plus the length of the term. Therefore, there is no risk you will lose money and you are guaranteed profits at the end of the term.
GIC returns do tend to be lower, but this does not mean you cannot take steps to maximize them as much as possible. One way people do this is through laddering their GICs.
Laddering is the process of investing GICS for different term lengths right up to a 5-year one that usually offers a high return. When the term expiry comes for the shortest length, re-invest the cash into a new 5-year term and do this for every GIC that comes to the end of its term. Alternatively, if you need cash you have the luxury of having GICs maturing at different times and therefore the option of keeping the returns.
The investments that you make are no doubt important to you as they allow you to achieve short and long-term goals. While many investment options available are pretty rigid regarding terms and conditions, GICs are unique because you have options to make them work for you.
As opposed to requiring an expensive minimum investment amount, GICS give you the opportunity to choose the amount you want to invest with the lowest being only $500. You can also choose the term that works for you with most institutions offering options ranging from 6 months to 10 years. In addition to choosing a term, some institutions allow you to choose the frequency of interest payments, allowing you to get paid every 3 months, 6 months, annually, or at maturity.
5. Insured investment
GICs are guaranteed but this does not mean you need to protect your investment, nonetheless. Luckily, most GICs are protected by deposit insurance.
Deposit insurance is offered by most larger institutions who are members of the Canada Deposit Insurance Corporation (CDIC). As a result, your principal investment as well as any owed interest is protected up to $100,000 if the institution that you purchased from folds. This insurance does not apply to GICs with terms over 5 years so be aware of this when you go to purchase your GICs.