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Guaranteed Investment Certificate
Triston Martin
Jan 07, 2023
You lend money to a financial institution for a certain amount of time at a predetermined interest rate in exchange for a GIC, a kind of investment product that typically offers a guaranteed return.
If you are prepared to let the bank or credit union store your money for longer, you will most likely be rewarded with a higher interest rate from the institution. For instance, a three-year GIC would give an interest rate greater than a one-year GIC.
How GICs Operate
When you purchase a GIC, you are effectively entering into a contract with the borrower, the financial institution, which states that you will be paid a certain amount of interest after the investment period has expired.
Take, for instance, a guaranteed investment certificate (GIC) that is available for one year and has an interest rate of 2%. If you put $1,000 into the GIC, you would get $20 in interest on your investment at the end of the year. That works out to a total of $1,020 at the end of the period.
When investing in GICs, you must commit your funds for the whole term of the contract if you want to reap the full benefits of the investment. Some GICs may be cashed in or redeemed at any time, but these GICs often come with a lesser interest rate. If you need to withdraw your money, you may be subject to a fee for doing so. GICs are normally unable to be redeemed for cash unless expressly specified differently.
Disadvantages of GICs
Before investing, you should be aware of some of the negatives associated with guaranteed investment certificates (GICs), even though these investments are risk-free and guarantee a return on your money.
- Putting money into a GIC will often require you to put in at least the bare minimum. Take, for instance, the amount of $500 or $1,000.
- If you want the full return on your investment, you will have to commit your money for the whole term.
- The interest rate on GICs won't keep up with inflation.
- If the GIC is kept in an account not registered with the government, the interest generated will be subject to taxation.
Are GICs Insured?
Even though guaranteed investment certificates (GICs) are reliable financial instruments, many still want to take further precautions to ensure that their money is secure if the financial institution fails. If you buy a GIC from a financial institution member of the Canadian Deposit Insurance Corporation (CDIC), your investment is protected up to a maximum of one hundred thousand dollars.
When you acquire a term deposit via a credit union or a Caisse Populaire, the organization responsible for providing your insurance protection is based in the province or territory where you now live. For instance, the Deposit Insurance Corporation of Ontario will protect a customer's investment up to a maximum of $250,000 if they purchase their GIC via a credit union in the province of Ontario.
How and Where To Purchase a GIC
It is easy to buy a GIC since almost all banks and other financial institutions sell them. If you already have an account with a bank or credit union, purchasing a GIC will often need a few clicks of your mouse. You may even buy GICs from a financial institution you do not bank with if you give one of their advisers a call or go to one of their branches. The versatility of the accounts in which GICs may be stored is one of the many attractive features of these investments.
- TFSAs
- RRSPs
- RRIFs
- LIRAs
- Non-registered accounts.
If everything goes according to plan, the sole account in which you invest in GICs is tax-friendly. This way, you can avoid handing over any returns to the Canada Revenue Agency. If you keep your GICs in an account that is not registered and subject to taxation, you will be taxed on the full amount of any interest you earn.
Different Kinds of GICs
Because your money is invested for a predetermined amount of time in a GIC, the product is sometimes referred to as a term deposit. The periods of a GIC may span anywhere from 30 to 10 years, with short-term GICs having durations of 30 days and long-term GICs having terms of 10 years. If you are familiar with the inner workings of the various varieties of GICs, you will have a better idea of which ones may be the most beneficial addition to your investment portfolio.
- Fixed-rate GICs
- Variable-rate GICs
- Market-linked GICs
- Registered GICs
- Non-Registered GICs
- Foreign Exchange GICs
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