In the wide world of investments, it can be difficult to know where you should be saving your money. From the stock market to mutual funds, guaranteed investment certificates (“GICs”) and plain old savings accounts, how can you know which method is best for safeguarding your cash and providing an excellent return on your investment? When you look at what you’re trying to achieve with each investment, you’ll find the answer becomes clear.
1. How Soon Will You Cash Out?
The first thing you should think about is how soon you’re looking to cash out your investment. This will give you some much needed direction for what types of investments to buy. GICs are a short- to medium-term investment. Depending on the GIC, it will typically mature in one to five years. The general rule of thumb for this type of investment is the longer the investment is parked, the more interest it will generate. So, for the best bang for your buck with GICs, you should generally expect to leave your money to mature for three years or more.
2. How Much Risk Can You Take?
Your risk tolerance is another important factor in choosing an investment. GICs are primarily for those who are very risk-averse; in the grand scheme of investment products, these are guaranteed to pay out 100% of your investment, plus an advertised amount of interest on top. For this reason, GICs are one of the safest options out there, and this is part of what makes them so popular. If you’re closer to retirement, this guaranteed return on investment may be right for you, so that you can safeguard your nest egg for use in retirement.
3. Are You Concerned About Fees?
One of the great aspects about guaranteed investment certificates is that typically, the rate you see advertised is the one you get. However, there are still fees attached to GICs, although unlike mutual funds and other investments, these fees are largely hidden from the buyer. Banks still incur costs for managing GICs, and hide these in lower interest rates for you, the end customer. Online banks and credit unions, who typically have lower overhead, are generally able to offer better rates since their management fees are lower.
4. What About Deposit Insurance?
Canadian banks are protected by the Canada Deposit Insurance Corporation (CDIC), that protects deposits up to $100,000, including GICs with terms of five years or less. Credit unions offer their own deposit insurance provincially. If you’re considering a GIC from a credit union, take care to understand the deposit insurance rules that apply, to make sure your investments will be protected if your financial institution unexpectedly goes belly up.
With some careful consideration of your motives for investing and your reasons for using your investments down the line, you’ll be able to determine which type is right for you. GICs offer a low-risk, medium-term investment with generally low fees and are backed by deposit insurance. So, if you’re looking for a safe investment option, GICs might be for you.
