GIC's are becoming popular once again: Banking manager
Guaranteed Investment Certificates (GICs) are back on investors’ radars as their return rates jump -- but factor in sky-high inflation and it means money invested in GICs is still ultimately losing purchasing power.
However, finance experts say these investment vehicles can still be a good option for Canadians in certain situations.
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“If people want to lock in a portion of their money -- keeping the capital safe -- knowing that they're not making a huge amount, if not losing once that inflation is factored in, GICs are an attractive option in the current environment,” said Mona Heidari, a financial advisor with Vancouver-based BlueShore Financial, in a phone interview.
Ratehub.ca shows one- and three-year GICs now boast returns above four per cent, while some five-year GICs offer returns of above five per cent.
GICs are investment vehicles that typically lock in an investors’ money for a set amount of time and pay a specified rate of interest income. Some GICs can be cashable but would have a lower yield. One of the key aspects of a GIC is that the money invested is, as the name implies, guaranteed, making it an ultra-low-risk option.
WHEN GICS ARE BEST
Frank Gasper, founder and wealth advisor at CSR Wealth Management, said he typically might consider a GIC if a client is saving for a specific, short-term purpose and can’t afford to lose any money.
“If you're saving for a vacation that's going to happen next year, or a bucket list vacation that's going to take two or three years to save for, that would be a good reason to look at getting a GIC,” he said by phone.
For emergency funds, he wouldn’t recommend GICs unless they were redeemable, since emergency fund money is meant to be immediately available to the investor.
“If you've got some short-term expenses, medium-term expenses, and you don't want to lose your capital, you're looking at interest-bearing investment vehicles that give you protection on your capital,” Heidari said.
“I believe that there's always a place for GICs in a portfolio, even during times that interest rates are very low. And looking at the last three, four years, a lot of people are still holding GICs because they could not afford to risk the capital that they have.”
With interest rates the highest they’ve been in recent memory, she also suggested it might be worth it for certain investors to consider a longer-term GIC to lock in the current elevated yields, if they know they won’t need the money during that time period.
TAXES EAT INTO RETURNS
It’s not only inflation that can erode GIC returns -- taxes are a major factor too.
When not held in a tax-sheltered account such as a Tax-Free Savings Account or a Registered Retirement Savings Plan, GIC interest income is taxed at the investor’s top marginal tax rate.
“If you're earning four per cent on a GIC on non-registered money, and if you're in a 40 per cent tax bracket, you're losing 40 per cent of that interest income to taxes. So you're not really earning four per cent on your GIC and again, inflation is running at 7.5 per cent -- you do the math -- you're losing quite a bit sitting in that GIC,” Heidari said.
GICs can be held in registered accounts but an investor would be limited by their contribution limits, she added.
For investors who might want to consider an alternative, Gasper suggested bond funds or segregated funds, which are similar to a mutual fund but come with a guarantee on the principal.
Meanwhile, Rob Townsend, chief executive officer of Calgary-based Camber Capital Private Wealth, said investors need to think about three things -- do they need the money, what do they need the money for and how much of the money do they need.
“That can help you understand what products could be used to have the highest probability of achieving the results that you're looking for,” he said by phone.
While every investor’s risk tolerance and capacity to withstand risk is different, Townsend pointed out historical data shows Canadian stocks outperformed cash or short-term fixed income investments over a five-year period 73 per cent of the time.
“You could frame it as, would you take a five-year bet of making money with 73 per cent odds,” he said.
Sometimes, investors might opt for GICs for psychological reasons, he added -- since equity investors will see losses in times of volatility, but GIC investors only see their rate of return while forgetting they’ve lost purchasing power.
“Nothing's free in this world. Risk and reward is always related. If they're giving it to you as a guarantee, you're giving up something,” Townsend said.