GICs are an accessible, low-risk form of investment. We know that might not mean a lot to you right now, and that’s ok. This article found you for a reason.
To better understand GICs — also known as term deposits — it’s helpful to know how they compare to other types of investments.
Let’s clear some things up.
Stocks, bonds, mutual funds, and – if you’re a credit union member – common shares, are all types of investments, but each one is structured differently, and bears a different risk.
*Shares have an individual value. For instance, today a share in Apple is worth $135 USD at the time of writing this.
Here are the main characteristics of a GIC:
- They are held at the credit union.
- Can be redeemable or locked-in, meaning you can either take it out early or lock it in for the full term.
- You’re guaranteed a higher interest rate the longer you invest.
- Interest rates are also higher when you choose a non-redeemable term. In other words, you’ve locked it in for the full 1 year, 3 years or 5 years.
- Your investment is covered by the Credit Union Deposit Guarantee Corporation*, meaning your investment is 100% insured – you can’t lose money (other institutions only guarantee up to a certain dollar amount).
How is a GIC a first cousin to a savings account? Here’s how it works:
You have $1000 sitting in a savings account earning .05% interest. That’s not a lot of interest. So, you want to put that money into an investment account but don’t want to lose any money, and don’t want to commit to anything for too long. GIC’s have your back. You can invest into a 1 year, all the way up to a 5 year term, with interest rates that are always higher than a savings account. connectFirst has a variety of GIC/term deposit offerings which can give you a better idea of what these rates look like.
Your risk tolerance.
Risk, risk, risk. Investment gurus are always talking ‘risk this’ and ‘risk that.’ You’ve probably heard the word so much, it doesn’t even sound like a word anymore. We’ll spell it out for you.
Risk tolerance is your comfort level with losing and gaining money over a period of time. For instance, if you invest $20,000 in Disney tomorrow, you might lose $5,000 one day, gain $1,000 another, lose another $5,000, gain $7,000. Some years you’re up, and some you’re down. And that can feel really scary. Some people want their profit to be more guaranteed than that. Others are comfortable with a little bit of loss if it means a long game of earning maximum profit.
Term Deposits are considered no-to-low risk. There is no chance of losing money, since, with a credit union, your principal investment is 100% guaranteed by the Credit Union Deposit Guarantee Corporation (CUDGC)*. You start with a base amount, which can be as low as $500, and earn interest off that amount. You can continue to roll-over into other terms as well.
The fine print: GIC/Term Deposit interest rates are low compared to what you could earn in mutual funds, stocks, etc. Stocks and mutual funds are vulnerable to losing money, but have the potential to earn more over time. GICs can be relatively “safer,” which is why understanding your risk tolerance plays a key role in your decision making.
Term deposits also may not keep up with inflation, depending on the option you choose. Sometimes inflation rates may swing above 1.6% and if that is your term deposit rate then you won’t lose money, but your money will be worth less b y the end of the term. Is it still better than that .05% interest rate on a regular savings account? In our opinion, yes, but it’s something to keep in mind.
Big banks won’t typically consider your investment until you meet a certain dollar amount, but we believe every Albertan deserves a conversation and access to expertise. If you’re not sure if a GIC/term deposit is right for you, come in for a chat.
If you want a low-risk, short-term investment option that offers you flexibility of when you can take funds out, then a term deposit may be the right fit.
If you want to save long term — say, for your child’s education — then there are other investment vehicles out there, and we’ll be happy to tell you all about them.
Make an appointment with one of our Financial Experience Advisors today to chat terms. We’re here for you.Book an appointmentAlberta GIC