Using a GIC in your investment portfolio

BY: FAZAAD BACCHUS 

A Guaranteed Investment Certificate (GIC) also known as a Certificate of Deposit (CD) or a Term Deposit is a well know investment vehicle. It is offered by many banks, credit unions and life insurance companies alike. It is mainly used by investors who prefer not to take any sort of market risk with their monies. Monies are typically deposited into the financial intuition where the investor becomes the lender and depending on how long you plan to “lend” this money to the financial institution, the more interest they will pay you. GIC’s are common to have a one year, three year or five year duration, with the longer duration of paying you more of course.

Some GIC’s are also redeemable, and for this feature, you are likely to receive a lower interest rate. A non-redeemable GIC will pay you a higher rate but can only be redeemed if you can provide a solid reason why you need to break it, reasons such as financial hardship is acceptable. There are penalties for breaking a GIC, it doesn’t matter where you purchased.

Generally, it is expected that a GIC will provide peace of mind; you do not have to put up with any volatility in the markets, but it does not mean that a GIC does not have any risk. A GIC has what is known as a default risk. A default risk lies where the financial intuition to which you have lent your money, gets into financial difficulty. If such were to happen there is a Canadian Deposit Insurance Corporation (CDIC) that would protect you up to $100,000 per each account, per each financial institution, if it registered with CDIC. This means that in the unlikely event that you have deposited more than $100,000 into a GIC and the financial institution go belly up; you would be covered only up to your $100,000.

There is also inflation risk that you may have to contend with. If your GIC is earning an average of 1.5 % per year and inflation is running at 2%, it is obvious that your money is depreciating while sitting in the bank. The rate at which you are lending is lower than inflation, so you lose value. You could consider the use of a Market Linked GIC, in this form of GIC your principal is guaranteed but your interest is determined by the investments in the market. There are similar periods where you have chosen the term of one, three or five years, however, the chances of earning a greater return are much more likely.

One major factor to be considered if you were to use a GIC at a Bank or Credit Union is the fact that you may not be able to name a beneficiary. This means that if you pass away, estate taxes or probate fees have to be paid on the sum. This probate fee can be avoided if you were to use a GIC which is sold at a Canadian insurance company. Beneficiaries named at insurance companies fall under different regulations and the GIC does not form part of the estate, it can be very private and less costly transition of wealth.

GIC has a place in an investment portfolio, but please ask an advisor first for help.