This has been a challenging year for investors. The markets have been throwing curveballs since the beginning of 2022 and investor returns have suffered. High inflation has also been a struggle for Canadians. To combat this, the bank of Canada has been consistently raising interest rates. While these conditions have caused investors a lot of headaches, the silver lining is that we are seeing better rates of return on high interest savings accounts and Guaranteed Investment Certificates, better known as GICs.
What You Need to Know
How Do GICs Work?
GICs are considered one of the safest investment options for Canadians, this is for two reasons: Investors are guaranteed to earn the rate of return promised when the GIC is purchased, and the eligible deposits in GICs that are issued by a member of the Canadian Deposit Insurance Corporation (CDIC) are eligible for deposit protection by CDIC. They work similarly to high interest saving accounts, except the money invested is locked into a term. This term is usually anywhere from 1-5 years. During the term of the investment, the investment cannot be accessed and will only be paid out when the GIC reaches maturity. Typically, the longer the term, the higher the interest rate will be.
When Should You Invest in GIC’s?
- Interest Rates are Rising
The success of a GIC investment strategy is dependent on the rate being offered by the financial institution selling the GIC. Low interest rate environments usually make GICs poorly performing investment. When rates are rising, however, GIC rates follow, and they can provide security and guaranteed returns in rough markets.
- Short Term Goals
Investors who have a specific goal in mind for the cash may find success in GICs. Investing in the stock market can be unpredictable and there are no guarantees that you will get your capital back. GICs are a great short-term solution that allows you to grow your savings, without the risk of losing your capital.
- You are Risk Adverse
GICs are one of the lowest risk investments available to Canadian investors. Those who are very risk adverse and do not wish to risk market fluctuations may find peace and success in the GIC market. The biggest risk to GIC investors is inflation risk. Inflation risk occurs when your investment is lagging the rate of inflation. For example, if inflation is 4% and your GIC rate is 2%, you are losing purchasing power.
GICs vs High Interest Savings Accounts
As a rule, GICs see higher rates of return than a high interest savings account. The trade off being that the money invested in a GIC cannot be accessed for the duration of the term. In instances where investors may need to dip into their savings on short notice, a high interest savings account is a more appropriate option. High interest savings accounts work similarly to a normal bank account, except they are eligible to earn interest. They are effectively risk free and offer easy access to cash.
High interest savings accounts are the best option for emergency funds and other “safety net” types of accounts due to their ease of access.
The Bottom Line
The current economic environment has thrown GICs into the spotlight once again. These guaranteed investments can help make up a diversified portfolio. in high interest rate environments by providing security and guarantees during uncertain times.
