After many years of turning investors off because of their low rates, guaranteed investment certificates—more commonly known as GICs—are back in vogue. Rising rates, along with recent volatility among stocks and bonds, have led investors to take a closer look at this humble and oft-forgotten investment product. In times of market uncertainty and stronger interest rates,  investors may wonder if GICs should play a more prominent role in their portfolios. 

We’ll review some common features of GICs, along with their benefits and disadvantages, which will help determine if GICs are appropriate in helping you achieve your financial goals. While they may be a worthwhile investment in certain situations, there are several considerations to be aware of before making any significant changes to your portfolio. 

What is a GIC?

As the name suggests, a GIC is a guaranteed or risk-free investment product offered by a variety of financial institutions. GICs generally provide a higher interest rate compared to a typical savings account, but also have lower return potential than higher-risk investment options such as stocks, bonds, or funds consisting of a mix of the two. 

There are many types of GICs, which all generally involve locking in an investment amount for a predetermined term. Common terms range in length from one to five years and are associated with an annual interest rate that is earned over the term’s duration until the GIC matures. Generally speaking, a longer term will offer a higher interest rate, because you are locking in your money for longer.

Redeemable versus non-redeemable

Redeemable GICs provide a degree of flexibility to cash out and access the invested funds before the term ends (typically after a minimum period of 30 or 90 days). This flexibility comes with a cost in the form of lower interest rates compared to a non-redeemable GIC with a similar term. Conversely, funds invested in a non-redeemable GIC are locked in until maturity, with no early access permitted. Regardless of the type of GIC, the interest earned is usually paid out upon redemption or maturity.

Benefits

• GICs pay a fixed-interest rate that usually delivers a higher return than a typical savings account.
• The initial investment amount as well as the interest earned are guaranteed.
• A variety of different terms and redemption options can be selected based on an investor’s unique goals and circumstances.

Drawbacks

• GICs typically offer lower return potential than riskier investments, which may not provide enough growth to adequately fund longer-term goals.
• Access to funds is limited until maturity and, if available, early-redemption penalties can be costly.
• GICs pay interest income, which is taxed higher than other forms of income like Canadian dividends and capital gains.
• Historical rates have not always covered declining purchasing power due to inflation. This was particularly pronounced for a large portion of 2021 into the middle of 2023 as shown in the graph below. The Consumer Price Index (CPI) is a key measure of inflation.

   

Source: Bank of Canada, Statistics Canada and Bloomberg

When do GICs make sense?

Given their various features, GIC investments are more suitable for conservative investors that are unwilling to assume any loss of their original investment amount, or for investors with shorter-term goals. For example, if an investor is saving for a down payment on a house in two years, they want to ensure their down payment is there in two years when they need it, while earning higher interest rates than they would in a savings account.

GICs can also be part of a diversified portfolio, making up the lower-risk fixed income component. GICs can also be used to make up a portion of an investor’s emergency savings, although the locked-in features should be carefully considered.

When do GICs make less sense?

Since GICs generally offer lower return potential compared to bonds or stocks, they aren't a great primary option for investors looking to grow their wealth to fund long-term goals such as retirement. This is especially true for real returns, which accounts for a loss of purchasing power due to inflation. In looking at the above chart, GICs don’t have a great track record of providing a meaningful return over and above the annual inflation rate, and in many cases, returns fall short, resulting in a loss of purchasing power. This is the current reality – despite the appearance of attractive rates, inflation remains high and is outpacing GIC rates.

For investors that have spent time determining their goals and established a suitable investment and savings plan to achieve them, making any significant changes to their portfolio at this time is not likely in their best interest. Selling during a market decline would turn a paper loss into a real one. The risks of such a decision are the same as those associated with any market-timing exercise. Missing out on a market recovery may put an investor behind schedule on achieving their financial goals. Furthermore, once in the safe embrace of a guaranteed investment like a GIC, it becomes difficult to break away from the comfort and get back into the market.  

Final thoughts

When their rates go up, GICs certainly look more attractive—at least at first glance. While GICs can play a role in your portfolio, it’s prudent to consult a financial professional before deviating from your current investment strategy based on market volatility or higher GIC rates alone. 

Upon reflection, if your current financial goals and personal circumstances haven't changed, then it probably isn’t the time to make changes to your investments. If you have experienced significant changes or it has been a while since you’ve reviewed your goals and investments, speaking to your advisor is always a good idea.