The markets are crazy now, and risk-averse investors are looking at safer options than stocks to park their money while still earning a return. That could be what's made Guaranteed Investment Certificates (GIC) attractive to many Canadians.
But what is a GIC? It's a promise that a bank will you a certain amount of money in exchange for you loaning them your money for a specified time.
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How much you’ll get paid fluctuates with interest rates and varies based on the length of the term—right now, for example, RBC will pay 4.5% on a 1 year-term for a non-redeemable GIC.
- GICs are considered a relatively safe investment since they are insured up to $100,000 by the Canada Deposit Insurance Corp. (CDIC).
Should I buy a GIC? It depends. Let's say you've got an extra $10,000 kicking around that you know you won't need in the next few years—buying a GIC could be a good idea.
- But most GICs lock in your money, meaning that if you needed quick access to that $10k in an emergency, you might be left paying a penalty if you can withdraw.
Some GIC "gotchas" to look out for:
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Autorenewals: Some banks will contact you when your GIC has reached its term and matured, but some won't. Instead, they will automatically renew your GIC, locking your money in for another term.
- Interest rates: Picking the longest term might seem like the method to make the best return—but it's not always so. John Heinzl of the Globe and Mail explains that if interest rates continue to rise, your five-year GIC will "collect the same yield" for the term.
Bottom line: Parking some cash in a GIC is safe, but the downside is you lose access to that money which could have you missing out on other investment opportunities should the markets change.