GICs are investments that provide a guaranteed rate of return over a set period of time, but beyond those basics, there's a lot more to consider. Here are five facts to keep in mind as you plan your financial future.
Given their low risk and straightforward way of investing, it’s surprising GICs (Guaranteed Investment Certificates) are not more widely known. Their guaranteed returns make them an alternative to a savings account and the low risk may make them worth considering for your investment portfolio.
Thinking of considering a GIC to diversify your portfolio? Here are 5 facts you should know:
1. GICs provide security on your initial investment
GICs offer the advantage of earning a fixed or variable return — unlike savings accounts and some investment accounts. GICs protect what you invest so no matter what happens with the market, you’ll never lose your initial investment.
When you invest in a GIC, you’re lending your money, knowing you’ll get it back in full by a specific date and with interest on top.
2. There are five different kinds of GICs
- Fixed-rate GICs. They guarantee the investor a fixed rate of interest for a specified period or term. At the end of the term, the financial institution returns the principal plus any interest payments owing to you.
- Variable-rate GICs. These tie their interest rate to a benchmark rate – otherwise know as the prime rate – so the interest you earn will fluctuate as it changes.
- Equity-linked GICs. The return is tied to a benchmark like a stock market index or basket of stocks. If the index rises or the value of the basket of stocks increases during the GIC term, investors gain a percentage of the increase. The GIC issuer normally limits how much an investor is affected by decreases.
- Rate-rising GICs. Also called step-up GICs. These offer you higher rates the longer you hold them. For example, 1% the first year, 2% the second year, and 3% the third.
- Foreign-currency GICs. GICs held in foreign currency — typically US dollars or Euros.
3. GICs have multiple ways to earn you interest
All GICs pay interest, but there are many ways you can choose from:
- A simple-interest GIC doesn’t t pay ‘interest on your earned interest.’ For example, if you invest $1,000 in a GIC that pays 5% simple interest annually, at the end of the year, you will still have $1,000 in your GIC, and the issuer will owe you $50, or $1000 × 5%.
- A compound-interest GIC pays interest on the interest you earn. The interest you earn is added to the principal amount.
4. You can choose how long you want your funds invested
How long you invest in a GIC can be days, months or years, depending on your needs and how long you’d like to invest the funds. Plus, with a cashable or redeemable GIC, you have the flexibility of cashing it out if and when you need to.
5. Your funds may be insured against loss
When a GIC is insured by the CDIC, no matter what happens with the issuing financial institution, your funds are safe. Deposit insurance is available for GICs held individually, jointly or in trusts.
So, if you’re looking for a way to diversify your investment profile, you may want to consider a GIC. Check out the new GIC products from RBC, or connect with an advisor to learn more.
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This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsem*nt of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
