How Does Guaranteed Investment Certificate (GIC) Work in Canada?

A Guaranteed Investment Certificate, or GIC is a type of Canadian investment in which the rate of return is guaranteed over a fixed period of time. This particular type of financial product is a relatively low-risk investment, and thus yields smaller returns than that of stocks, bonds and mutual funds. GIC's are typically offered by banks or trust companies. These safe and secure Canadian investment vehicles earn interest at a fixed rate, variable rate, or based on a market-based index. Many Canadians view Guaranteed Investment Certificates an excellent choice for a portfolio that requires a measure of safety.

How do Guaranteed Investment Certificates Work? 
With these products you will invest an amount of money (determined by you) for a period of time that is determined by the specific type of GIC that you choose. Typically these periods of time vary greatly and can tend to range anywhere from 1 day to 10 years. Investments with longer terms will earn more interest than short term ones. When your Guaranteed Investment Certificate reaches the end of its term (otherwise known as 'maturity,') you will be able to access not only your initial sum of cash, but the earned interest as well.

Some Canadian Guaranteed Investment Certificates require that the amount of money you invest initially remain 'locked in' for a minimum period of time (30 days for example). Other GIC's will allow you to access your money before the maturity date. There are even Guaranteed Investment Certificates that allow you to add to your initial cash amount by making weekly, biweekly or monthly contributions.

Redeemable vs. Non-redeemable 
Guaranteed Investment Certificates can be redeemable or non-redeemable. As aforementioned, there are some GIC's which allow you to access your cash during the term. This is referred to as 'redeemable.' With redeemable assets, you will be able to withdraw your cash before maturity. Some redeemable GIC's specify that you will earn less interest if you cash out prior to maturity. The non-redeemable counterparts do not allow withdrawals before the maturity date. Non-redeemable GIC's may offer higher interest rates than redeemable ones.

Interest 
This particular type of Canadian asset can be offered at either fixed or variable interest rates.

Fixed Rate GIC's 
With a fixed rate GIC, your money will earn interest at a set rate. That is, the interest earned will be consistent throughout the term of the investment. The benefit of fixed rate GIC's is that you can predict exactly how much your total assets will be worth on the maturity date.

Variable Rate GIC's 
Variable rate Guaranteed Investment Certificates are either linked to the Canadian prime interest rate or to stock-market performance. With interest-rate linked GIC, you are guaranteed that your money will grow, but you will not know at which rate until maturity. With market-linked GIC's, you can earn more interest if the stock market does well, but your initial investment will be protected either way.

Benefits of GIC's 
The most important benefit offered by this type of investment is safety and security. Your initial cash amount will be protected. With fixed-rate GIC's you can also enjoy guaranteed growth and an easy way to project value at maturity. GIC's are also known to offer excellent interest rates. Finally, GIC's are typically pretty flexible investments. You can enjoy flexibility in length of term as well as how often you receive payments.

If you live in Canada and are interested in investing your money in a safe instrument, a Guaranteed Investment Certificate may be right for you. To find out more about what is available in your area, visit your local bank.

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