What The Heck Is A GIC? And When Is A Good Time To Invest? We Asked An Expert

With the Bank of Canada raising interest rates and inflation going berserk, many Canadians are now looking more closely at their finances — particularly how to improve their financial health. For millennials and Gen Z, this often entails looking at investments for the first time. One (relatively) simple investment vehicle are Guaranteed Investment Certificates or GICs.

What is a GIC, anyway?

According to Ryan Evans, a financial planner with the IQPF at Bank of Montreal, a GIC is "an investment vehicle that does guarantee your capital while offering you a specified rate of interest over a certain period of time." This means that your investment is held for a "locked term" and is guaranteed to grow at a fixed rate.

GICs can be a very secure way to invest since they are guaranteed both through the bank issuing the GIC and the Canadian Deposit Insurance Corporation (CDIC). "So they are very, very low-risk investments and they are designed to meet specific goals in certain situations," said Evans. Of course, GICs aren't always the best option for everyone, so talking with a financial advisor is key.

How GICs can be customized

The interest rate on a GIC can vary depending on a variety of factors, including, "the length of time that you keep your investment on deposit, and also the cashability of the investment as well."

"There are certain GIC investments that are more flexible, that can be cashed," Evans explained. "Many GIC's are in a locked term," meaning that the money can't be cashed before the term ends. "So it is a locked product but there are GIC products that are also cashable within certain parameters. The chashability of an investment will affect your interest rate."

Typically, cashable GICs have a lower interest rate.

GIC investments can be held in different plans. "Many investors may not know that they can be held within, for example, an RRSP or a TFSA if that's appropriate for them," Evans said. "GICs could be great solutions for short medium [term] goals. It could also be a good added value to an existing portfolio."

"There are also Market Linked GICs which also can be good solutions for medium-term investors. What that does allow is still the capital being guaranteed and it does offer a potential for a higher return depending on market performance."

"A potential investor could always check different institutions for rates but also product features as well that may best suit their needs."

Why invest?

"It's always important to make investments," Evans said. "Right now, it could be a very important time given the rate of inflation being so high."

Evans added that, while starting to invest is always a good idea, now may be a good time to look into GICs in particular. "GICs have become a lot more interesting recently since the Bank of Canada has raised interest rates quite a bit this year." The Bank of Canada, Evans added, is expected to raise interest rates again in 2022. "The rate of interest that an investor may receive on those investments is looking a lot more interesting. For many years they have been quite low."

"At this time, while the Bank of Canada is raising rates, GICs may be a good alternative product to investing in bonds right now," Evans added. "As the Bank of Canada does raise their interest rates, current bonds may not be as appealing. In this climate right now, it may be appropriate to consider GICs as an alternative to bond investments right now."

The important thing is to talk to a professional about your financial objectives in order to decide if GICs (or other investment vehicles) are a good fit for you.

"Think about your goals, speak to a financial advisor or a financial planner to really make defined goals and really see [if] a GIC is the most appropriate investment for them," Evans said.