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GICs – Guaranteed Investment Certificates Explained

Tom Drake — Tue, 22 Jun 2010 09:00:05 +0000

Guaranteed Investment Certificates (GIC) are a low risk investment were you lend banks, trust companies and credit unions money for a defined time frame and get a certain interest rate in return. This interest rate is based on the length of time you agree to lend the money and what the current interest rates are like at that time. While many of us with mortgages think of low interest rates as a good thing, when you’re investing in GICs you’ll be hoping for interest rates to rise up quickly.

The risks when investing in Guaranteed Investment Certificates

GICs have a guaranteed interest rate and the principal is insured by the CDIC. However, inflation rates and lack of preferential tax treatment are risks associated with Guaranteed Investment Certificates. Inflation rates can potentially be higher than the guarenteed interest rate of the GIC you invest in. This would actually mean you are losing money after adjusting for inflation. GICs are taxed at your marginal tax rate, so you may want to consider placing them in an RRSP, TFSA or RESP to shelter the interest you earn.

How to invest in Guaranteed Investment Certificates

Since GICs provide higher interest rates when locked in for a longer period of time, you may want to consider building a Guaranteed Investment Certificate ladder. To do this, you split your money available to invest into five equal portions and invest those amounts into 1, 2, 3, 4 and 5 year GICs. From that point, you are set to decide each year whether to reinvest your annual amount for another 5 years. If rates are good, you could continue reinvesting for 5 year terms. When rates are low, you may decide to move your annual amount to a different investment. By building a GIC ladder, you have the benefit of the long term high rates and the flexibility of access to a portion of your investment each year.

While not very attractive with the current interest rates available today, rates will eventually come back up to the pre-recession levels. Once interest rates have moved back into normal territory, you might decide that Guaranteed Investment Certificates would be a worthwhile addition to your portfolio leading into retirement.

GICs – Guaranteed Investment Certificates Explained originally appeared on Canadian Finance Blog on June 22, 2010.

Build A Guaranteed Investment Certificate (GIC) Ladder

Tom Drake — Thu, 16 Jul 2009 09:00:13 +0000

Guaranteed Investment Certificates (GIC) provide a guaranteed form of income provided you lend your money for a set amount of time. There is a way to increase the flexibility of when you can withdraw and decrease the risk of investing at a low interest rate.

GIC laddering involves splitting up your investment into separate terms. If you have $5,000 to invest, you could purchase 5 separate $1,000 GICs, each maturing one year later. So in this example, you would purchase:

A 1 year GIC for $1,000
A 2 year GIC for $1,000
A 3 year GIC for $1,000
A 4 year GIC for $1,000
A 5 year GIC for $1,000

Having your GICs laddered like this gives you $1,000 back each year, plus the interest it earned, as opposed to having the entire $5,000 locked in for the full 5 years. This provides you an annual opportunity to decide what you’d like to do with the money. You might choose to turn it over into another GIC if interest rates are good. In this case, you could continue the ladder by purchasing a 5 year GIC each following year, since you’ll always have GICs maturing every year for the next 4 years.

On the other hand, if interest rates are low that year, you might decide to invest your matured GIC in stocks or mutual funds if their prices look reasonable. This is the flexibility that GIC laddering provides.

Build A Guaranteed Investment Certificate (GIC) Ladder originally appeared on Canadian Finance Blog on July 16, 2009.

Are Guaranteed Investment Certificates (GIC) Risk Free?

Tom Drake — Wed, 15 Jul 2009 09:00:25 +0000

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.

Are Guaranteed Investment Certificates (GIC) Risk Free? originally appeared on Canadian Finance Blog on July 15, 2009.

What Are Guaranteed Investment Certificates? (GIC)

Tom Drake — Tue, 14 Jul 2009 09:00:14 +0000

Guaranteed Investment Certificates, or GICs, are a form of investment where you agree to lend money to a bank for a set amount of time. The bank agrees to pay you a certain percentage of interest to borrow this money. The amount of time might only be 90 days or as much as 10 years. You will most often receive a higher interest rate for a longer time commitment.

Since you are agreeing to lend your money for a certain amount of time, there are often downsides to breaking that agreement and withdrawing your money early. With some GICs, there may be a penalty or you may not earn any interest if it only pays out at maturity. If there is a possibility of needing the money earlier, you might want to look into redeemable GICs. Redeemable GICs allow you to withdraw your money without penalty, however they will likely pay less interest.

Guaranteed Investment Certificates may be a good investment choice if you want a safe, short term, place to save your money. GICs could be used as a part of a fixed income portion of your portfolio, or simply to hold your money while you decide what you’d like to do with it for the long term.

What Are Guaranteed Investment Certificates? (GIC) originally appeared on Canadian Finance Blog on July 14, 2009.