Currently, the best GIC is a 1 year GIC offered by EQ Bank at a rate of 5.75%.
GICs (Guaranteed Investment Certificates) are a popular investment option in Canada due to their low-risk nature and guaranteed returns. If you’re considering adding GICs to your investment portfolio, there are a few key considerations you should keep be aware of:
1. Non-Redeemable vs. Redeemable GICs
Definition: These GICs lock in your investment for a set term. You cannot access the principal amount until the maturity date.
Interest Rates: Typically, non-redeemable GICs offer higher interest rates than redeemable ones due to the locked-in nature of the investment.
Ideal For: Investors who are certain they won’t need access to their funds before the maturity date.
Definition: These GICs allow you to access your principal amount before the term ends, either in whole or in part.
Interest Rates: Redeemable GICs usually offer lower interest rates compared to non-redeemable ones since they provide more liquidity.
Ideal For: Investors who want the flexibility of accessing their money if needed or those uncertain about their future financial needs.
2. Registered vs. Non-Registered GICs
Definition: These GICs are held within registered investment accounts such as RRSPs (Registered Retirement Savings Plans), TFSA (Tax-Free Savings Accounts), or RESPs (Registered Education Savings Plans).
Tax Advantages: Interest earned within registered GICs is either tax-deferred (as in RRSPs) or tax-free (as in TFSAs).
Contribution Limits: Registered accounts have yearly contribution limits. Ensure you’re aware of these limits to avoid over-contributing.
Definition: These GICs are not held within any registered account.
Tax Implications: Any interest earned on non-registered GICs is fully taxable in the year it’s received.
Flexibility: There are no contribution limits or restrictions on the use of funds, providing more flexibility in terms of investment size and purpose.
3. Why Do Rates on GICs Vary?
Several factors influence the interest rates offered on GICs:
Economic Environment: Central bank policies, inflation rates, and overall economic health play a significant role in determining GIC rates. For instance, in a rising interest rate environment, GIC rates tend to increase.
Term Length: Typically, longer-term GICs offer higher rates compared to shorter-term GICs. This compensates investors for locking in their money over an extended period.
Liquidity: As mentioned earlier, non-redeemable GICs generally offer higher rates than redeemable GICs due to the locked-in nature of the investment.
Issuer’s Financial Health: Institutions in robust financial health might offer slightly lower rates than those trying to attract more deposits for capital requirements.
4. Laddering Strategy
Definition: This involves purchasing multiple GICs with different maturity dates, allowing for a portion of the investment to mature periodically.
- Flexibility: You have access to a portion of your money regularly, providing liquidity while still enjoying the benefits of longer-term rates.
- Rate Fluctuations: Laddering can help mitigate the risk of locking in all your money at a potentially lower rate. If rates rise in the future, you can reinvest a maturing GIC at that higher rate.
5. Foreign Currency GICs
Definition: These GICs are denominated in a currency other than the Canadian dollar, such as US dollars or Euros.
- Currency Risk: The final returns could be influenced by exchange rate fluctuations.
- Diversification: They offer an opportunity to diversify, especially if you have future expenses in that currency or want to invest based on a bullish outlook on a particular currency.
6. Market-Linked or Indexed GICs
Definition: Instead of a guaranteed fixed interest rate, the return on these GICs is tied to the performance of a market index or a group of assets.
- Potential for Higher Returns: If the linked index performs well.
- Protection of Principal: Your initial investment is typically guaranteed, even if the market drops.
- Caps on Returns: There might be a maximum return, meaning you might not capture all of an index’s potential upside.
7. Provider Reputation
Safety and Security: GICs are often insured up to a certain limit by the Canada Deposit Insurance Corporation (CDIC) or provincial deposit insurance, but always check the specifics for your institution.
Customer Service: Consider the provider’s reputation in terms of customer service, online accessibility, and user experience.
8. Early Withdrawal Penalties
While non-redeemable GICs are meant to be held to maturity, unexpected life events can occur. It’s essential to:
- Understand Penalties: Know the penalties or lost interest if you must cash out a non-redeemable GIC early.
- Plan Accordingly: If you believe there’s a chance you’ll need the funds, a redeemable GIC might be a more suitable option despite the potentially lower interest rate.
While GICs offer guaranteed returns, the real value of these returns can be eroded by inflation.
Real Returns: It’s the interest rate minus the inflation rate. Even if a GIC has a positive return, you might lose purchasing power if the inflation rate exceeds the interest rate.
Investing in GICs is not just about locking in money and waiting for it to grow. It requires a strategic approach considering various factors beyond just interest rates. By taking a holistic view and understanding all nuances, you can optimize your GIC investments to suit your financial goals and risk profile.