A guaranteed investment certificate (GIC) is an investment where the buyer gives the lending institution an amount of money for a specified term. The buyer receives the money back after the term plus interest based on either the rate at the time of the purchase or a variable rate. GICs have always been popular because they guarantee a return on the initial investment with interest and are safer than buying stocks. The purchase of GICs seems like a no-brainer but mostly all lending institutions offer them under different terms so there are a few things you need to consider before buying. You want to make sure you purchase a GIC right for you and following this guide will allow you to do so.
1. Decide on investment
Before you purchase one or more GICs, you have a few decisions to make. First, how much do you want to invest? The minimum amount that you can purchase a GIC for is usually $500. Obviously, the more you invest the higher rate of return you will receive in interest at the end of the term. Also of importance is how long your term will be. You can usually choose a period of 6 months, 1 year, 2 years or up to 10 years. The longer the term is, the more you will earn in interest. Base your decision on whether your goals are short-term or long-term when choosing the length of the investment.
2. Type of GIC
There are a few types of GICs so choosing one that best suits your needs before purchasing would be beneficial. If you do not want a long-term commitment, cashable GICS are only locked in for at least 30 days and you can cash in on your investment any time after that. Interest is gained until the day you cash out. A market GIC is a product that is tied to the performance of the stock market. This type is attractive because the buyer gets their initial investment back after the term and carries the potential of earning more interest depending on the performance of the stock market. A foreign currency GIC would be a good option for people with foreign funds who want a guaranteed interest rate and wish to be protected against exchange rate fluctuations.
3. Shop around
As stated, many institutions offer GICS with different conditions such as interest rate and term of investment. Shop around, compare the best GIC rates between different providers, and choose the one that will benefit you the most based on the amount of money you decided to invest and term of the investment. Be mindful of when you want to receive interest rate payments. Most, but not all, institutions let you choose to either get paid every 3 months, 6 months, once a year, or on the date of maturity depending on the type of GIC purchased. Make sure the institution allows you to be paid when you want. Before purchasing, calculate how much return on the investment you will receive. If a GIC will not live up to your expectations, you may want to consider another option.
4. Fixed or variable rate?
GICs offer either a fixed or variable rate so you need to decide which one is best for you before purchasing. A fixed rate is a safer choice as the interest rate does not fluctuate therefore guaranteeing you a specific amount of interest in addition to your original investment at term expiry. A variable rate is riskier. It guarantees you will be paid your principal investment but the interest rate is based on either the prime rate of the lending institution or the performance of the stock market. Variable rates are sometimes chosen due to their potential to increase interest payments at term expiry.