What is a GIC?

A Guaranteed Investment Certificate (or GIC) is an investment that offers a guaranteed rate of return over a specific period of time.

How risky are GICs?

GICs are on the safer end of the spectrum. Any money you deposit in a GIC is guaranteed by the issuing financial institution to provide a known rate of return, which makes it easy to figure out how much money you'll have when your term is up.

GICs have a wide range of terms and flexibility. Some are nonredeemable, which means that you can't move the money out until the end of the term. Generally speaking, the longer the term, the better the interest rate.

GICs are also available in registered investment vehicles such as RRSPs, RESPs, or TFSAs. If you invest in a GIC within one of these registered plans, you may benefit from tax savings and/or deferring tax payments until you withdraw your money from the plan.

3 Reasons to choose a GIC:

1. Your savings goal is short term (1-3 years)

   You can't predict when markets will rise or fall, so if you won't have enough time to ride out a potential market slump, a GIC—with its guaranteed rate of return—is a safe investment option. You can purchase a GIC to invest in your Tax-Free Savings Account (TFSA) and benefit from tax savings along the way.

2. You cannot tolerate any drop in value of your investment

   With some savings goals, you know how much money you will need and when you'll need it. For example, if you want to buy a car in two years and that car will cost $15,000. With the right initial contribution and rate of return, a fixed-term GIC will ensure you build that savings amount. A guaranteed rate of return is also good if any kind of risk makes you extremely nervous—a GIC may be what you need to sleep at night.

3. You want to take advantage of tax savings in an RRSP, but aren't ready to commit to a more aggressive savings strategy

   In most cases, GICs aren't a great vehicle for retirement savings. With long-term goals, the rates of return just aren't high enough to allow for the real benefits of growth to take effect. But if you can't handle even a minor fluctuation in the market and want to use GICs as part of your RRSP, you may want to consider a laddered strategy—which involves purchasing GICs of different terms and renewing them when they mature. An investment expert can explain this strategy in more detail.

Keep inflation in mind

If you are earning a lower rate of return over a longer, fixed period of time, you should consider the effect that inflation may have on the value of those savings. As of December 2013, Canada's inflation rate has averaged about 2 per cent. That means that something for sale in 2013 will have a price tag 2 per cent higher in 2014, 4 per cent higher in 2015, and so on. If you're saving for retirement, you may be saving for purchases that you'll make 20, 30, or even 60 years down the line. Imagine the impact inflation will have in that amount of time.

To keep up with inflation, your long-term investments should grow at least 2 per cent every year.

In short...

Depending on your savings goals and attitude towards risk, a GIC may be a good addition to your investment portfolio. Their guaranteed rates of return provide stability and a reliable source of funds at the end of your term.

Visit our Investment Savings page to explore GICs and other investments that could work for you. Having an investment portfolio that matches your financial goals is important, and an investment expert can help you build one.