GIC basics for the Canadian investor

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Scott Boyd

October 15, 2015


Are you interested in learning how GICs could be incorporated into your portfolio, but confused by how they work? Are you unsure how to find the best GIC rates, or even if it makes sense for you to invest in GICs at this particular time?

If this describes you, then this 3-part series of posts centred on GIC investing in Canada should be part of your required reading. Not only will you learn the basics of GIC investing, you will also see examples of how GICs can be used to achieve specific objectives.

With that in mind, let’s get started by explaining what a GIC is, and the terms associated with GICs.

So, what exactly is a GIC?

A Guaranteed Investment Certificate (GIC) is really just a loan that you provide to the financial institution issuing the GIC. In return for depositing your money with the financial institution, you receive a guaranteed rate of return (interest) for the length of the term of the GIC, as well as return of your principal (initial investment).

In other words, the GIC issuer guarantees that your initial investment, as well as the interest, will be paid to you either at the end of the term or at prescribed intervals during the term of the GIC contract. For this reason, a GIC is considered fixed-income type of investment that will pay the advertised interest rate no matter what happens in the markets or the larger economy.

Risk and reward

Because Oaken Financial is a registered trademark of Home Trust, which is a member of CDIC, Oaken GICs are fully eligible for CDIC coverage, up to all applicable limits.

Like any form of investment, a GIC is subject to the relationship that exists between risk and reward. This is really just an elaborate way of saying that the greater the risk to the initial investment, the greater the potential reward the investor expects in return.

Because the risk of loss with GICs is very low, the corresponding return is also relatively low when compared to other investments that carry more risk. So while GICs may not be the most exciting investment you can hold in your portfolio, they remain one of the best options for preserving wealth, while still earning risk-free interest. After all, when it comes to protecting your investment, too much excitement is not always a good thing.

One thing you should always confirm before investing in a GIC is that the financial institution issuing the GIC is a member of the Canadian Deposit Insurance Corporation or CDIC. This ensures that even if the financial institution in question becomes insolvent and unable to honour its obligations, your investment is insured up to the applicable CDIC limit. You can learn more at the CDIC website.

Decoding the language of GICs

When considering GICs, there are some industry terms you need to know. There is nothing complicated here, but you just need to understand the terms so you can compare GICs from different financial institutions.

Minimum depositFinancial institutions offering GICs will typically impose a minimum amount that you can deposit. A $1,000 minimum is common, but you may also see a $500 minimum.
Rate of return / interestMost GICs pay a fixed rate of return, however some GICs offer a variable rate of return where the interest paid fluctuates in accordance with market conditions. For example, a financial institution may offer a GIC with its rate of return linked to a benchmark financial instrument such as the prime lending rate or a stock exchange index. In these examples, should the prime rate or the stock index change, this change would be reflected in the GIC’s return.
Payment scheduleThe payment schedule defines when you will be paid the interest your investment has earned within the GIC. Payment schedules are usually monthly, semi-annually (every six months), annually, or at maturity.
TermThe term is the length of time your money will be held on deposit. Typical term lengths include 1 month, 6 months, 1 year, 2 years, 3 years, 5 years, and even longer. Note that the CDIC does not cover GICs with terms exceeding 5 years.
Maturity dateThe maturity date is the last day of the term, and the principle plus the remaining interest due will be paid as of that date.
Cashable or redeemable GICWith a cashable or redeemable GIC, you can withdraw your money at any time should you need access to the cash before the maturity date. Note that you can expect a cashable GIC to pay less interest than a comparable non-cashable GIC, as you give up some revenue in exchange for the increased flexibility.

This covers the GIC basics and should give you enough information to determine if GICs should be part of your financial plan. In the next installment of this series, we look at how to use typical GICs for specific savings objectives.

This post is intended for informational purposes only. It is not an inducement to purchase securities and is not to be considered financial advice. Always do your research before making any investment decisions.