Guaranteed Investment Certificates (GICs) have long been a popular investment option for Canadians looking for a low-risk way to grow their savings. With interest rates rising in 2022, GICs have become even more attractive for investors seeking stable returns. This article provides a comprehensive overview of GICs – from how they work, to their benefits and drawbacks, and tips for maximizing GIC returns. We’ll also look at the major Canadian banks and credit unions that offer GICs. For those considering this classic fixed-income investment, read on to learn everything you need to know about getting started with GICs in Canada.
GICs provide guaranteed returns and capital preservation
The key advantage of GICs is that they guarantee your principal investment and a specified interest rate over a fixed term. This makes them ideal for conservative investors who prioritize capital preservation over high returns. GIC interest rates are usually higher than regular savings accounts, often 1-3% currently, which helps your money grow faster. The major banks provide CDIC coverage up to $100,000 per GIC, ensuring your principal is protected in the rare case of a bank failure. While GIC returns are lower than stocks and bonds, the guaranteed nature provides peace of mind for those who can’t stomach market volatility.
Considering GIC terms and interest rates is crucial
When purchasing GICs, you’ll need to choose both the investment term and type. Shorter terms of 1-5 years have lower rates, while longer terms of 5 years+ offer higher rates. The tradeoff is less flexibility with longer terms. GICs also come in cashable and non-cashable varieties – cashable GICs allow you to withdraw funds after a short holding period, at the cost of slightly lower rates. Compare GIC rates from different banks to find the best returns. Consider laddering GICs across multiple terms to balance flexibility and higher rates. Also, time purchases for when rates peak – the best deals are often found when the Bank of Canada raises its benchmark rate.
Use GICs appropriately within your investment portfolio
As a fixed-income product, GICs are well suited to the conservative portion of an investor’s portfolio. They can provide stability and income that balances out the risk of equities and other volatile assets. Limiting allocation to GICs and bonds to around 40% allows for better long-term growth potential. GICs pair well with blue-chip dividend stocks and low-fee ETFs. As you near retirement, increasing fixed income allocation helps secure your savings. Keep an emergency fund in savings instead of GICs for easy access to cash. Understand that while safe, GIC returns often lag inflation, meaning you need growth from other assets too.
Shop around for the best GIC rates from major banks
While GICs are offered by all major banks, regular rate comparison shopping is key. Banks frequently run promotions to attract GIC investment, so keep an eye out for special rate offers. Online banks sometimes provide higher returns than the Big 5 banks. Credit unions are another option, with community-focused options and competitive rates. Consider using GIC brokers like RateSpy.com to easily compare rates across institutions. Break up your GIC investment across several institutions to take advantage of promotions and CDIC coverage. Look beyond the major banks if you want the best GIC rates in Canada.
With interest rates rising, GICs are a smarter fixed-income investment than they’ve been in many years. Their guaranteed returns provide stability amidst volatile markets. Make sure to ladder maturities, compare interest rates, and hold GICs as part of a diversified portfolio for solid returns with low risk.