Why GICs might be a better investment than stocks and bonds
Why would an investor consider a GIC as part of their investment portfolio? Here are six reasons.
1. GICs have a guaranteed return
A GIC is a safe investment with minimal risk. For the first time in about 15 years, GIC rates have breached 5%; meanwhile, the Canada Pension Plan (CPP) is currently estimating a future 6.6% long-run return for Canadian stocks. This suggests that for most investors paying 1% to 2% in fees, their net returns may be comparable to today’s GIC rates. And, unlike with stocks or crypto, you don’t have to worry about volatility reducing your return when you buy a GIC.
Most GICs pay a fixed interest rate, so investors know how much income they’ll get on the certificate’s maturity date (end of its term). Some GICs have a variable interest rate, which is influenced by market fluctuations—their rate of return is not guaranteed, but their principal is guaranteed.
Some investors include GICs as part of the fixed income portion of a diversified portfolio. Others buy GICs to hedge against market volatility, and many people use GICs to safely grow their money while saving towards a large purchase.
2. Investors can choose from different GIC terms
GICs offer terms ranging from three months to 10 years, with a corresponding guaranteed rate of return—generally, the longer the term, the higher the interest. That means you can choose the term that works best for your needs.
If you know you’re going to need your money soon—say, for buying a car, going on vacation or making a down payment on a home—then a three-, six- or nine-month GIC might be the right option for you. If you don’t need access to your money for a while, then a term of one year or more might be the better option.
GICs are great for investors who want to “set it and forget it,” knowing that they’ll receive their original capital plus interest on a specified date—you can’t say the same about investing in stocks.
3. GICs are eligible for CDIC protection
Unlike stocks, mutual funds and bonds, GICs are eligible for Canada Deposit Insurance Corporation (CDIC) deposit insurance, which adds another layer of security—at no charge to you. The CDIC protects deposits up to $100,000 per eligible deposit category at each of its member institutions.