BJK Financial Group Blog

When it comes to investing, finding that perfect balance between risk and reward can seem very complicated. If you're someone who prefers security over the ups and downs of the stock market, a Guaranteed Investment Certificate (GIC) might be exactly what you’re looking for. In this blog, we’ll discuss what a GIC is, how it works, and other important things to keep in mind before choosing this type of investment. 

What Is A GIC?

The GIC is a guaranteed investment certificate, meaning it offers a guaranteed rate of return after a fixed period of time, most commonly issued by banks or trust companies. This is different from many other investment products such as stocks, bonds, mutual funds, etc., in the sense that the GIC is very low risk. Unlike stocks, bonds or mutual funds, where your gains or losses are based on the market's day-to-day performance, the GIC is not. The GIC rate of return you receive will be disclosed upon purchase, and these rates are affected primarily by the Bank of Canada’s policy rates and the market competition with other banks. The GIC is guaranteed because it is a loan to the banks and after a fixed period of time you will receive your money back and with that a guaranteed personal gain from the interest accumulated. The trade-off here is that GIC does typically have lower returns than high-risk options that do well but if you're looking for security and a guarantee it's a solid choice. Although this investment is not high-risk, it is still important to get all the right information before getting started and make sure this type of investment is right for you. 

Real vs Nominal Return 

 Another component to better understand the GICs is to consider the real vs the nominal return. To start, the nominal return which is the most commonly used to describe a return is simply the face-value interest you’re receiving, meaning if you are told 5 % rate of return that doesn't account for any outside factors meaning your real return could be different. Now the real return, which is what you would really receive, is affected by the growth and profits caused by outside factors, mainly inflation and even potentially deflation. Inflation being where each dollar has a diminishing purchasing power, and deflation the opposite. Here the same nominal return of 5% with a 3% inflation will only give you a real return of 2%, the nominal returns are what most GIC are present as, however the real return is what matters. Besides that, here are a few of the important questions to ask yourself that are recommended by the government of Canada before entering an GIC agreement ": 

What is the term of the product, how and when the interest, if any, is to be paid?

• If the annual interest rate is fixed, what is the annual rate of interest?
• If the interest rate is variable: how they calculate it, any charges that apply and their impact on the interest payable, the dates the investment period begins and ends? (trust and loan companies only)
• If you can cancel the product and how?
• If they can amend a term or condition and if so in what circumstances?
• Any risk associated with the product, including if no interest accumulated?
• Any charges that apply and their impact on the interest payable?
• Whether or not the Canada Deposit Insurance Corporation (CDIC) will insure the product?

CDIC Coverage

 Now focusing on that last question about the CDIC, typically the GIC is covered by the CDIC and it is also one of the few investments that is covered by the Canada Deposit Insurance Corporation. This means that if the bank or the trust company that provided the GIC were to go under or have financial troubles making them no longer able to pay back the client, the CDIC would be able to step in and reimburse the client up to 100,000$ per deposit insurance category for both deposits and interest acquired. The only exception here is for the GIC’s issued by a provincial credit union and caisses populaires which are member-owned financial institutions, which takes on the roles of a typical bank and are the equivalent to credit unions in the United-States. These are not covered by the CDIC but may still be protected by the provincial deposit insurance.  It’s also important to note that GIC’S are not their own CDIC insurance deposit category but are rather deposit products that are held in any CDIC deposit insurance category.  

Finally…

GICs offer a reliable and straightforward way to grow your savings with minimal risk, making them a satisfactory option for newer, conservative investors or even those just looking to balance out their portfolios. While the returns offered may be lower compared to most investments, knowing that you're going to be looking at a steady growth and being often insured by the CDIC brings most the peace of mind to proceed with this option.