Yesterday we discussed what is a GIC, lets now look into any risks associated with a GIC. Guaranteed Investment Certificates are generally considered to be risk free investments. However, there are some risks that you need to be aware of and also some ideas to reduce those risks.
Since your principle is guaranteed, and your interest rate is often also guaranteed, there is not much of a risk premium involved. This means that the gains you can expect are lower since the risk is lower. While this low interest may be guaranteed, it’s not guaranteed to beat inflation. If your GIC is providing a 1.5% interest rate but the annual inflation rate is 3%, then your real inflation-adjusted rate of return is -1.5%. You can increase your return by getting the best interest rate possible. This involves not only looking at what is offered among banks and credit unions, but also ask your banker for a better rate. Like many other bank rates, these can be negotiable.
There is also a tax liability that needs to be accounted for. Interest on GICs is fully taxable at your marginal tax rate. Because of this, you should consider holding any GICs in a RRSP or TFSA to shelter the gains until you withdraw the money. In the example above, tax could remove at least 0.5% of your return, now leaving you with a real rate of return of -2% after adjusting for inflation.
While a GIC can add to a diversified portfolio as a source of fixed income, be aware of the steps you can take to reduce the chance of losing money. Make sure you get the best rate possible and shelter your income from taxes.
For me,to consider several invest ways is the best choose,I never heard GIC before.Thank you for your introduction.