A GIC is a Guaranteed Investment Certificate. It is a low risk investment option that guarantees your capital investment along with your interest rate for a predetermined term. GICs can also be known as Term Deposits.
GICs are usually sold at a lower interest rate than other types of investments, in exchange for the capital and interest rate guarantee. There is no risk when we invest in GICs, but there is also no opportunity for long term growth.
Guaranteed Investment Certificates are not good investments for Young Investors because they are not long term investments. GIC are usually not linked to the stock market indexes in any way. Therefore, our money is guaranteed and will earn a fixed interest rate, but it does not have the potential for long term growth.
As young investors we are investing for the long term, and we most likely want our money to grow over the years. If we invest $5000 in our Retirement Savings Account when we are 20, we definitely don’t want it to still be worth $5000 when we are 35!
Some people may think that it is better to have our money guaranteed rather than take a risk and possibly lose some of our money. We have to ask our self…What is our Investment Priority? Do we want security or do we want growth? If we choose to invest in higher risk investments such as Mutual Funds , we should expect to see fluctuations in the short term, but in long term we should experience growth. GICs are the total opposite of Mutual Funds. GICs will have no fluctuations in their value, but they will also have very little growth.
Guaranteed Investment Certificates are locked in for a predetermined term. This means that we cannot access our money before the term is over if we have an emergency. Some financial institutions do allow us to cash in our GICs early, however there will be a penalty, which may be higher than the interest that we earned.
GICs earn interest and therefore they are taxable at our highest tax rate. Therefore, not only are we not earning a lot of interest on our investments, but we are also being taxed the most on the (little) interest that we do earn.
GICs are suitable investment options for older investors whose investment priority is security and not growth. Older investors are most likely looking for security in their investment options because they may need to start using the money to supplement their income if they are retired.
Alternative Low Risk Investments to GICs are Money Market Mutual Funds, Bond Mutual Funds and Preferred Shares. It is always best to contact a professional investment advisor before choosing any investment options.