In today’s investing environment, investors have a plethora of options to choose from to grow their money over time. Stocks, bonds, mutual funds, ETFs, and a whole assortment of other income-focused investments and securities are available.
In this article I’m going to discuss guaranteed investment certificates and why an investor may choose to put a portion of their hard-earned money into such a vehicle.
Reason #1: Security. The vast majority of investments cannot guarantee the principal portion of the underlying investment. The risk/return equation is something investors need to stomach – the upside potential of a security cannot exist without downside risk. That said, guaranteed investment certificates (GICs) are one of the only investments that are truly guaranteed. Similar to bank deposits, GICs are insured by the government up to a limit (typically $100,000).
Reason #2: Higher interest rates than deposits. Given a choice of leaving money in a bank account earning near-zero interest or earning between 1%-2% per year on a GIC (depending on the terms) is a no-brainer. If a portion of money is being saved for an event at a specific point in time down the road, a GIC is an effective tool to put the money away and earn a small return at the same time.
Downside: Money is locked in. In general, GICs typically come along with a contract stating the deposited money will not be available for withdrawal for a specific period of time. Such a contract can become a problem, should the investor need the money for any reason. The terms of each GIC vary, so remember to contact an investment advisor before making any decisions.
