Every Type of GIC Explained
Investment is a prominent and significant part of our lives. There are many options available in the market where you can invest your money to get the best of the best return possible. One of those alternatives is guaranteed investment certificates (GICs). It is an alternative for deposit investment provided by banks and trust companies.
If you’re new to this world, you’re probably wondering what type to purchase. There are all kinds of certificates available to investors, each of which come with its unique pros and cons. Learning about each type is the first step in finding one that best aligns with your financial goals. Keep reading to discover every type of GIC.
Fixed-Rate GICs
As the name suggests, Fixed-rate certificates are those with a fixed interest rate. This means that the interest rate is established at the start of the term and remains constant throughout. One benefit of going for this alternative is that you can calculate the future and estimate the returns more accurately than others since the terms and future are predefined from the inception.
Variable-Rate GICs
Variable-rate enables investors to earn additional money from their investments. The interest rate on this is directly related to a bank’s prime rate. In other words, when your bank’s prime rate increases, your interest rate goes up along with it. Conversely, if your bank’s prime rate goes down, your interest rate goes down. However, with a variable rate, you are always guaranteed your principal.
Market-Linked GICs
These certificates provide the best of both worlds, mixing the benefits of traditional guaranteed investment certificates with the benefits of stock-based investments. They are hybrid investment products linked to a particular stock market index. They offer safety and security when you provide a potentially higher ROI depending on the success of the specified market index.
Fun Fact: These certificate terms can range between 30 days to 10 years. But the most popular of them varies between 1 to 5 years.
Step-Rate GICs
Also known as escalators, is a type of investment where the interest rate is guaranteed to grow every year. Unlike variable or adjustable-rate certificates, the interest does not fluctuate up and down over time; it only grows or “escalates.” This might seem fascinating to a lot of you. And why not, but there are some terms and conditions behind everything. So, to stay out of any chance of risk or damage, consider all of those conditions.
Registered GICs
These are held in a government-registered savings account, such as a Tax-Free Savings Account, Registered Disability Savings Plan, Registered Retirement Savings Plan, or Registered Education Savings Plan. Investments held in registered accounts are not subject to taxation and, consequently, tend to offer investors greater returns. That said, registered accounts come with their own specific rules and regulations that must be followed.
Non-Registered GICs
Not all of these certificates are kept in registered savings accounts like TFSAs or RRSPs. Some of them, like Non-Registered ones, do not follow the same rule. Therefore, these types of certificates may be subject to taxation; however, they are also less regulated than registered investments. This makes it simpler to withdraw your money once your terms mature.
Foreign Exchange GICs
Last but not least, Foreign exchange certificates are those that are not kept at Canadian financial institutions. For example, U.S. ones purchased in U.S. dollars are a popular option. They enable investors to earn interest on foreign currency while simultaneously diversifying their portfolios. Keep in mind that the Canadian Deposit Insurance Corporation (CDIC) does not back foreign GICs.
Fun Fact: In the current scenario, the national average of interest rates is 3.03% which is, unfortunately, lower than the long-term average of 4.38%.
Cashable, Redeemable, and Non-Redeemable GICs
The types listed above can all be purchased as cashable, redeemable, or non-redeemable GICs. Unless otherwise specified, most of them are non-redeemable. However, if you want greater flexibility (i.e. the ability to withdraw your money at any time without penalty), choosing a cashable or redeemable GIC may be the wisest choice.
Wrapping Up
In current demographics, there is a whole ocean of alternatives where you can seed your money to grow in the future. With most of them involved with high risks and requires a lot of skills, banks offer deposit investment options for you also known as GIC.
In this article, we curated a list of types of certificates that you can explore and find the best one that suits your needs. It is strongly advised to consult a financial expert before making a move. This way you can minimize the damage to its lowest and can also learn some skills through the advice.
