Guaranteed Investment Certificates (GICs) are investments which not only guarantee your initial investment but also provide a fixed rate of return over a specified period. Short-term GICs are usually for less than a year. The short-term maturity date helps you plan your expenses efficiently while earning interest on funds that you don’t need immediately.
When you buy a Short-term Guaranteed Investment Certificate (GIC), you’re making an agreement to lend the financial institution money for a period of between 30 to 365 days. The financial institution guarantees to return back the deposited amount at the end of the term. You will also earn some interest at the rate agreed upon, but longer the term, the higher the interest rate you’ll earn.
Should I invest in Short-term GICs?
When you look at the current interest rate environment, you will realize that you can’t just invest or even lock in your assets for a long term hoping that the interest rates might increase in the years ahead. Investing your money for a long term is more likely to leave you with very limited options when it comes to accessing your money. The best option that will provide you with flexibility is making short-term investments even though you will get a lower rate. Despite the fact that long-term investments tend to offer higher interest rates, you will have less flexibility. So what are you going to choose?
If you’re looking for a way to invest your money towards a short-term goal, short-term GICs could be an excellent option. Short-term GICs are a great option if you want to accumulate funds fast for a big ticket purchase like a home, new car, or a down payment on a mortgage.
GICs are appropriate for anyone who wants to guarantee their principal amount since they provide a guaranteed payout just as the name suggests. You have probably never understood why many investors choose to have short-term GICs in their portfolio. When you invest in a short-term GIC, you would be aware of the amount you’re going to receive as soon as the term is over. You won’t be worried about market price fluctuations because the invested amount remains safe and sound. You won’t have to worry about losing your principal.
If you want to have an investment that offers a liquid, yet stable rate of return, a short-term GIC would be the right choice. Remember your money won’t be locked for an extended period of time as it happens with long-term GICs. Short-term GICs gives you the flexibility you need in the current interest rate environment. Despite the fact that they offer lower interest rates, Short-term GICs remain a good option for anyone who wants to park a portion of their money. They provide a safe way of investing funds while saving for large purchases and future investments.
Benefits of Short-term GICs
Before you invest in a short-term GIC, it’s important to consider the following features and restrictions.
- The Canadian Deposit Insurance Corporation offers protection for the deposited amount up to set limits except GICs with terms over five years and US dollar GICs.
- Short term GICs provide you with the opportunity of reinvesting your earnings sooner especially if you're expecting an increase in interest rates in the near future. You can take advantage of the possibility of higher interest rates as well as respond to interest rate changes. That’s the benefit of investing in a short-term GICs, but you should ask yourself what will happen when the reverse comes true. It means you’re also taking a risk just in case there’s a decrease in the interest rates - you would have missed the current rates for long-term GICs.
- Short-term and Cashable GICs offer maximum flexibility, without committing yourself for a long-term. It’s an ideal investment alternative if you want to maintain maximum access to your funds and still earn a guaranteed return.
- Note that most financial institutions won’t allow you to cancel the contract before it matures if you have a short-term GIC. That means most short-term GICs are non-redeemable. Make sure you’ve read through the fine print before buying a short-term GIC.
- You may consider a high-interest Savings account, which usually has an open term and may offer higher interest rates than short-term GICs. However, make sure you’ve checked the transaction fees when looking at high-interest savings accounts. The transactions costs could reduce your interest.
What are Cashable GICs?
A cashable GIC is a one-year term investment and an excellent choice for anyone who thinks the interest rates might increase in the near future. When you purchase a cashable GIC, you’re agreeing to lock in your investment for a closed period of either 30 days or 90 days before you can cash it out at any time without paying any penalty.
Benefits of investing in a Cashable GIC
Some of the factors you must look at when choosing which investment is right for you, include your risk tolerance, your time horizon, and your goal. Do you want to have your money readily accessible? Are you willing to make a higher level risk investment to get higher returns? When do you intend to have the proceeds of your investment? These are critical questions to ask yourself even as you choose from the different types of GICs. Cashable GICs will make you money readily accessible which means you will enjoy the flexibility of this liquid investment. However, you may receive lower interest rates compared to non-redeemable GICs.
Your primary goal should, therefore, be having access to your money and not getting the high-interest rates. It’s the perfect investment option if you’re anticipating a major purchase shortly. You don’t have to lock in your money for a set term when you’re expecting an increase in the interest rates. Cashable GICs give you the opportunity to quickly redeem your money and reinvest it somewhere else where you can earn higher returns.
High-interest savings accounts tend to move with the market changes and fluctuations. With a Cashable GIC, you can lock in your money at the current interest rate meaning you won’t have to worry about any declines in the interest rates. Which one seems to offer more benefits? Cashable GICs will present a better investment opportunity in a market environment where interest rates are dropping.
It’s, however, important to note that withdrawing your money during the first 30 or 90 days, when the GIC is supposed to be locked in would result in no interest at all. We’ve already pointed out that cashable GICs tend to offer slightly lower interest rates compared to what’s offered on non-redeemable GICs. These are some of the things you would have to face when investing in a cashable GIC. You may refer to them as drawbacks, disadvantages or restrictions!
Before investing in a cashable GIC, note that there’s usually no interest penalty and you receive the contract interest rate until the time of encashment. You will be required to leave a minimum remaining balance for you to continue holding the cashable GIC. And don’t forget that you will have to lock in your money for the first 30 or 90 days before the GIC becomes cashable. If you choose any redeemable GIC, make sure you’ve gone through every detail and the restrictions and terms of the product.