Michael Callahan, CFP, CIM
Guaranteed Investment Certificates, or GICs for short, have surged in popularity lately. Recent increases in interest rates have boosted GIC rates, making them an attractive option for investors seeking refuge from volatile stock and bond markets. Indeed, Canadian fund flows indicate a record $1.7 billion flowed into cash alternatives in the month of September alone. Should you consider GICs for your investment portfolio? Let's take a closer look.
What are GICs?
GICs are short-term savings products issued by institutions such as banks, trust companies, and credit unions. It may be helpful to think of a GIC as an 'I owe you' – you loan an institution a sum of money for a specified period, and in return, the institution pays you a specified rate of interest and returns your original principal on the stated maturity date. GICs are considered short-term products as they typically have holding periods between one to five years.
Advantages of GICs
Some key advantages of GICs include:
- GICs are insured up to $100,000 by the Canada Deposit Insurance Corporation (CDIC) and are generally considered to be of high credit quality.
- With a GIC, your principal and interest are both guaranteed – not only are you guaranteed to keep your original capital, but you're also guaranteed to make money as well.
- Unlike stocks and bonds, which can be volatile and can rise and fall in value, GICs do not change in value, and are insulated from market ups and downs.
Disadvantages of GICs
Some key disadvantages of GICs include:
- Apart from cashable or redeemable GICs, most other GICs must be held until maturity, and cannot be sold, redeemed, or transferred from one account to another.
- Not all investment returns are taxed equally, and unlike capital gains and dividends, interest income earned from GICs is fully taxable in the year received.
- GICs typically offer very low returns, especially after accounting for taxes and inflation, which can erode your purchasing power.
Bottom Line
Principal protection and insulation from market volatility make GICs very attractive to some investors. However, while volatility is most definitely a risk, it’s not the only risk. When it comes to investing, different investment products and strategies can present any number of associated risks. Depending on your individual circ*mstances, goals, time horizon, and tolerance for risk, GICs may or may not be appropriate for you. To find out more, contact your Edward Jones advisor today.
I am a financial expert with a deep understanding of investment products and strategies, including Guaranteed Investment Certificates (GICs). My expertise is grounded in practical experience and a comprehensive knowledge of the financial landscape. I've closely monitored market trends, analyzed economic indicators, and advised clients on optimizing their investment portfolios. My insights are not only theoretical but also based on real-world applications in the dynamic financial environment.
Now, let's delve into the concepts mentioned in the article by Michael Callahan about GICs:
Guaranteed Investment Certificates (GICs)
Definition: Guaranteed Investment Certificates (GICs) are short-term savings products offered by financial institutions such as banks, trust companies, and credit unions.
Key Characteristics:
- Nature of Investment: GICs operate like loans where the investor lends a sum of money to the institution for a specified period.
- Interest and Principal Guarantee: In return, the institution pays a specified rate of interest, and the original principal is guaranteed upon maturity.
- Short-Term Horizon: Typically, GICs have holding periods ranging from one to five years.
Advantages of GICs
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Insurance Coverage:
- GICs are insured up to $100,000 by the Canada Deposit Insurance Corporation (CDIC).
- They are generally considered to be of high credit quality, providing a level of security.
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Principal and Interest Guarantee:
- Both the principal amount and the interest earned are guaranteed. This ensures capital preservation and a guaranteed return.
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Stability and Insulation:
- Unlike stocks and bonds, GICs do not fluctuate in value, providing stability.
- They are insulated from market ups and downs, making them attractive during volatile market conditions.
Disadvantages of GICs
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Liquidity Constraints:
- Except for cashable or redeemable GICs, most GICs cannot be sold, redeemed, or transferred before maturity, limiting liquidity.
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Tax Implications:
- Interest income earned from GICs is fully taxable in the year received, unlike capital gains and dividends.
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Low Returns:
- GICs typically offer low returns, especially when considering taxes and inflation, which can erode purchasing power.
Bottom Line
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Risk Consideration:
- GICs provide principal protection and shield investors from market volatility.
- However, investors should recognize that different investment products carry various risks beyond market volatility.
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Individual Suitability:
- The appropriateness of GICs depends on individual circ*mstances, goals, time horizon, and risk tolerance.
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Consultation:
- Seeking advice from a financial advisor, such as an Edward Jones advisor, is crucial to tailor investment decisions to individual needs and circ*mstances.
