Risks of GICs

Guaranteed Investment Certificates (GICs) are considered lower-risk investments. That’s because you are guaranteed to get back the amount you investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition — the principalPrincipal The total amount of money that you invest, or the total amount of money you owe on a debt.+ read full definition — when your GIC matures. Still, GICs have some risks.

2 key risks

  1. May not keep pace with inflationInflation A rise in the cost of goods and services over a set period of time. This means a dollar can buy fewer goods over time. In most cases, inflation is measured by the Consumer Price Index.+ read full definition – Because regular GICs have a relatively low return, they may not keep pace with inflation.
  2. Variable returns with indexIndex A benchmark or yardstick that lets you measure the performance of a stock market, part of a stock market or a single investment. Examples: S&P/TSX, S&P/TSX Canadian Bond Index.+ read full definition or market-linkedMarket-linked A guaranteed investment that works a bit like a stock as well. What you make is tied to the performance of an equity investment (such as stock or a stock market index). But you will not lose money if you hold the investment until it matures.+ read full definition GICs – These GICs don’t pay a fixed rate of interest. Instead, your return is based on the performance of a benchmarkBenchmark A yardstick that you can use to measure the performance of an investment. Example: a stock market index may be a benchmark you can use to compare how well your own stocks are doing.+ read full definition, like a stock market indexStock market index A listing that tracks a group of stocks and their value. Stocks in a given index will have something in common; they may trade on the same exchange, belong to the same industry or be about the same size. Indexes can help assess the results of mutual funds.+ read full definition. If the stock marketStock market The collection of markets and exchanges where stocks, bonds and other securities are issued or traded.+ read full definition does well and the index rises, your index GIC could do better than a fixed-rate GIC. If the index doesn’t do well, you may make less, or nothing at all.

Other things to consider

  • You may pay a penalty if you cash in a GIC early.
  • The interest you earn on a GIC will be fully taxed if you hold it outside of a registered plan. Learn more about how investments are taxed.
Caution

Because GICs are lower risk, they have a relatively low return compared to other investments. And they may not keep pace with inflation.

Make sure your GICs are protected

Your GIC is insured if you bought it at:

  • any major Canadian bank. Banks are members of the Canada Deposit Insurance Corporation (CDIC).
  • a credit unionCredit union A non-profit financial institution whose members own and operate it. Members can borrow money at low interest rates and make deposits. Sometimes large organizations set them up for their members or employees. Offer services similar to a bank such as chequing and savings accounts.+ read full definition or caisse populaireCaisse populaire A credit union which is primarily found in the province of Quebec.+ read full definition. Similar insurance is available for deposits.

This means you will get your money back if the financial institution where you bought your GIC closes down or is unable to pay you when the GIC matures. Coverage depends on the value and type of GIC you hold. For example:

  • CDIC insurance covers you for up to $100,000 in GICs at each financial institution.
  • U.S. dollar GICs and GICs with terms longer than 5 years are not insured.

The insurance is automatic. You don’t have to do anything, and you don’t have to pay anything extra, to get it.

3 tips to make sure your GICs are protected

To help you stay within the $100,000 limit per financial institution, you can:

  1. Buy GICs at different financial institutions or their related companies. Example: a bank may have a mortgageMortgage A loan that you get to pay for a home or other property. Often the loan is for 20 years or more. You make a set number of payments for a set amount each year.+ read full definition company or trust companyTrust company A company that offers the same services as a bank, but can also manage estates, trusts and pension plans, which banks cannot do.+ read full definition that sells GICs.
  2. Put some of the GICs in your name and some in your spouse’s name.
  3. Own GICs jointly with your spouse.

Warning

If you hold more than $100,000 in GICs from any one financial institution, the excess amount will not be protected against loss.

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