Guaranteed Investment Certificates – Shop Wisely
Written by Jim Yih •
While most of you are familiar with Guaranteed Investment Certificates (GICs) also known as term deposits, you may also be confused by the number of variations of these once simple investments.
With interest rates increases, GICs have renewed appeal, especially from conservative investors. And why not, there is a crossover point for investors at which they will choose a GIC over non-guaranteed investments.
I often refer to a study by Marketing Solutions in Toronto where Canadians were polled with the question: “at what point would you buy a GIC?” Only 12% of Canadians would buy a GIC at 5%. It is no wonder that so much money has moved to mutual funds. 44% of Canadians would buy a GIC at a 7% rate of return and we are getting closer and closer to that point today. Finally, 78%of Canadians said they would buy a GIC at 9%.
As rates inch higher, there will be more people interested in the world of guaranteed investments. I offer you three very important tips when contemplating which GIC to buy.
1. SHOP RATES. Every day, financial institutions fight to attract your investment dollars. They offer different rates for varying terms. The difference between the lowest rate and the highest rate is often more than a full percent. Over time, this difference becomes very significant, so be sure to shop rates! Don’t just settle for posted rates from a bank. You can shop rates by calling around, using a deposit broker or visiting some internet sites like .
2. SHOP PRODUCT. Indexed, step rate, cashable, and convertible are just a few examples of how financial institutions are getting creative about marketing GIC investments. Whatever the type, be sure to shop product. Not all GICs are created equally. Read the fine print. For example, step rate GICs that increase their rates year by year, must disclose the equivalent compound return equivalent. Usually it is in very small print, so pull out those glasses and read the disclaimers!
3. SHOP COMPANY. Sometimes the company with the best rate is not always the best place to invest your money. Remember Principle Group? They had the best rates at one time. It is important to know whether the financial institution is insured (through CDIC, Compcorp, etc). When you are investing in GICs, you are really lending that institution money hoping that they pay back your capital and interest. Think about whether that institution is going to be around to pay you back in the future. Generally, your investments are insured up to $60,000 per institution.
The lesson here is simple: while GICs may appear to be simple and safe, don’t be lured by marketing, or the belief that all GICs are the same. Be sure to shop rate, product and company.