GICs are having a moment – here’s why

How long you invest your money for is up to you, and the length of a GIC term usually ranges from 1 to 5 years. What if you suddenly need the cash? Some GICs allow you to access your funds before the end of the term, at prescribed early cashing rates or with loss of interest entitlement. These are called cashable or redeemable GICs.

Then, there’s the interest rate. Depending on the type of GIC you choose, the amount of interest you earn may stay the same or it may change over time.

Fixed-rate GIC

Pays the same rate of interest over time.

Variable-rate GIC

Pays a variable amount of interest over time, based on the prime lending rate.

Market-linked GIC

The interest you earn depends on how well a stock market index or basket of securities performs. This includes the possibility of not receiving any interest payment.

Escalator GIC

Pays an increasing amount of interest in each period of the term.

Comparing GICs to other investments comes down to a balance of risk and reward. They are likely to give you a lower return than investing in stocks or bonds, over the long term. But your original investment is protected, which makes it an appealing option in uncertain times.

GICs are closer to bonds than stocks, since the concept is similar: you invest some money and get some interest. Unlike bonds, though, they don't lose value if interest rates rise. This is an important thing to keep in mind for investors who are concerned about interest rate increases. In some ways a GIC is similar to a high-interest savings account, but GICs may offer a better return depending on interest rates and other factors.

So, when do GICs make sense? You may want to consider GICs if you have a specific savings objective measured in years rather than months, are fairly confident you won't need the money sooner and don't want to risk losing money along the way. Say you have a wedding in two years or a dream vacation in three years. GICs are a good fit for these situations.

The return on GICs is not going to be stunning, but it might help reduce the bite that inflation takes out of your savings, compared to leaving your money in a bank account. And your principal is guaranteed when you need it.

Investors can also use GICs as part of an investment portfolio. GICs can replace some of the money that an investor would normally put in bonds, particularly in periods when interest rates are expected to rise. One of the simplest ways to do this is to create a GIC “ladder”.

Here's an example of how it works. Say you have $50,000 to invest. You divide the money into five equal portions and invest $10,000 in five separate GICs, each with a different term ranging from one year to five years. When the bank repays your one-year GIC, you invest that amount in a new five-year GIC.

So, what’s the benefit? In short, laddering your GICs can help you maximize your returns while giving you flexibility. Instead of locking up all your money for five years, you always get some of your money each year and can reinvest it, which is handy if interest rates go up. And rather than investing all your money in one-year GICs and then renewing each year, the ladder enables you to put some of your money in longer-term GICs, which typically pay a higher rate of interest.

This year has been an uncertain time for financial markets, which makes the guaranteed returns from GICs an attractive option for investors to consider. Ask your advisor whether GICs could make sense as part of your portfolio. Check out our GICs.