So when does a GIC make sense for you?
Let's explore some scenarios below:
You don’t want to be tempted to spend money
If you've come into (or saved) a large sum of money and want to resist the temptation to spend it on something frivolous, there's no safer or better place for it to grow than a GIC. Not only will you get a better interest rate than you would in a regular savings account, but your funds will also be protected by your bank and either the Canadian Deposit Insurance Corporation (CDIC) or a provincial organization.
It's also worth noting that if protecting your money from yourself is the highest priority, a non-cashable (or non-redeemable) GIC is your best bet. Unlike cashable (or redeemable) GICs, which can be withdrawn early if desired, a non-cashable GIC will force you to pay a penalty if you want to take your investment out before the end of your term. Using this as a deterrent, you'll hopefully win out in the end with the interest added to your initial deposit.
You don’t want to lose any money/take investment risks
While inflation in Canada has been easing, markets are still unstable and you may feel that it's not the right time to throw your money into stocks and bonds. In cases like this, the heightened security of a GIC can be an attractive option as you're guaranteed to get your money back plus the promised interest. Plus, interest rates for GICs have never been higher, with some rising to levels of 4-5%.
And for those who like the idea of a GIC but still crave a bit more risk, a market-linked GIC is the perfect compromise. While regular GICs guarantee your principal investment back plus an agreed-upon interest rate, market-linked GICs are tied to a specific stock index or mutual fund. This means that you'll still get your initial deposit returned in full, but your earnings on it will depend on how well its stocks or bonds have performed. In this way, market-linked GICs tend to have one foot in the GIC world and one in the market.
You want a portion of your money in fixed income
GICs and bonds are considered to be types of fixed-income investments. Allocating a portion of your portfolio to fixed income can help reduce risk and volatility. GICs are easy to understand while bonds can sometimes be a little more complicated. You should ideally buy a variety of bonds to reduce your interest rate risk and credit risk. An alternative is to buy a bond mutual fund or a bond exchange-traded fund. Both are diversified and very liquid investments.
You're retired and want a quicker return
While younger investors have plenty of time to endure the stock market's peaks and valleys as they patiently wait for a recovery, retirees don't always have that luxury. That's why GICs are perfect for older investors on a fixed income. Your money will be locked away for a period of time that you decide, and you'll always be guaranteed to get it back with the promised interest attached.
Unlike savings accounts, GIC rates are guaranteed
GICs and high-interest savings accounts have quite a bit in common. Both are extremely safe investments that offer guaranteed (albeit, modest) gains while ensuring you won’t sustain any losses.
However, the two differ in some respects.
For one, the rate on a savings account isn’t guaranteed and can change at any time, even after you opened the account. We’ve already seen it happen in the midst of COVID-19, as cuts in the Bank of Canada’s prime rate has led several financial institutions to lower their savings account rates for new and existing clients. With a GIC, you won’t have that same problem, as your interest rate will be locked in from the time you opened the account to however long your term lasts. In short, rates on a GIC are guaranteed so you won’t have to worry about abrupt changes, especially in an ultra-low interest environment.
That said, savings accounts do offer the advantage of flexibility by letting you withdraw your funds at any time, while with a GIC, your money will be locked in for a set period of time (anywhere between 90 days to 5 years, depending on the terms of the GIC you open).
