Guaranteed Investment Certificate: Advantages and Disadvantages

Are you interested in buying into a GIC? Before you do, it’s important to consider the guaranteed investment certificate advantages and disadvantages. Overall, GICs are safe, reliable investments, but that doesn’t necessarily outweigh the cons. On the contrary, GICs have low returns which often fail to keep up with inflation. Ready to learn more? Continue reading to understand all of the advantages and disadvantages related to guaranteed investment certificates!

What is a Guaranteed Investment Certificate?

A guaranteed investment certificate, or GIC for short, is a deposit investment sold by Canadian banks and financial institutions. GICs are known to be low risk and reliable investments. In addition, they provide a fixed rate of return. They are also insured by the Canadian government which means your investment is quite safe, hence the term “guaranteed”.

When you decide to invest in a guaranteed investment certificate, you’ll put forward a lump sum of cash. Your money will be locked into the GIC for the term of the investment. Fortunately, terms are quite flexible and can range anywhere from three months to five years, sometimes longer. In exchange, you’ll receive a fixed rate of interest. Normally, you can choose whether or not you want the interest paid out periodically or reinvested into the GIC. At the end of the term, your deposit and any unpaid interest will be given back to you.

Often, people choose to invest in GICs when they have a deadline for savings. For instance, if you know you need to pay your tuition before the start of the term in September, you can invest in GICs that mature in August. Alternatively, one might use GICs as an emergency fund or to diversify their investment portfolio.

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What are the pros and cons of guaranteed investment certificate?

Now that you know what a GIC is, let’s explore the guaranteed investment certificate advantages and disadvantages below.

Safe, reliable investment. If you don’t want to risk your money or want to diversify the risk in your portfolio, GICs are a good choice. Locked in money. Once your money is in a GIC, you can’t access it until the term is up. In some cases, you might be able to break the term early, but you could face a penalty.
Options. There are a variety of term and interest rate options for GICs. Fully taxable. Unlike capital gains and dividends, interest income is fully taxable in the year it was earned, unless you hold GICs in a tax-sheltered account.
Fixed term and interest. You will know exactly when your GIC will expire and how much interest you’ll earn at the end of the term.Low returns. While GICs are safe, the returns are very low compared to other kinds of investments.
Insured. GICs are insured up to $100,000 by the Canada Deposit Insurance Corporation (CDIC).Opportunity cost. By having your money locked into a GIC, you might lose out on other lucrative investments.
Avoid market ups and downs. Regardless of what’s going on in the market, GICs remain consistent.Minimum amount. Often, GICs have a minimum amount required to invest. This is usually $500 or $1,000, depending on the institution.
Available in tax-sheltered accounts. You can invest in GICs within your TFSA, RRSP or other tax-sheltered accounts. Won’t beat inflation. The rates of return on GICs rarely out perform inflation. This means you lose purchasing power because your money isn’t growing at the same pace as inflation.
Easy to understand. Unlike other investments, GICs are very straightforward and can be understood by a beginner investor.

Is it better to buy a GIC or leave your money in a savings account?

Guaranteed investment certificates normally have higher interest rates than savings accounts. For this reason, it’s better to invest in a GIC than a savings account. Although, it’s important to note that cash reserves are important too. Should you need the money in a GIC, it can be difficult to get it out without a penalty. Be sure to keep some cash on hand in case you need it unexpectedly.

Which Canadian bank is best for GIC?

The best GICs are those that pay out high interest in the shortest period of time. Below are the top five best Canadian banks for GICs:

Canadian Bank/Financial InstitutionInterest RateMinimum InvestmentTerm
Saven Financial5.3%$1,0001-Year
Oaken Financial5.25%$1,0001-Year or 18 Months
Alterna Bank5%$5001-Year
Wealth One5.28%$1,0001-Year
Motive Financial5.2%$1,0001-Year
All information as of February 2023.

Is it worth putting money into GIC?

Guaranteed investment certificates have advantages and disadvantages, just like every other investment. They can be useful for certain purposes, such as saving for something that has a fixed timeline, like education or a planned vacation. In addition, GICs can be great for adding a layer of security to your investment portfolio if you take a lot of risks. At the end of the day, whether or not it is worth putting money into a GIC is a personal decision. Be sure to consider your financial goals, appetite for risk, and your budget before investing in GICs.

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