When you think Guaranteed Investment Certificates, you make think of muted-tone flower-patterned granny panties or something boring like that. Or you might not. Maybe it’s just  me.

GIC’s can actually be a very good tool in the fixed income portion of your portfolio.  Just like granny panties are a staple in your wardrobe (disclosure: I personally do not own any pairs).   Although GIC’s are predictable, sometimes predictable is good (as we learned from the market crash last year).

GIC’s can be non-registered, in your TFSA or in your RRSP.

I would recommend these be held in an RRSP or a TFSA because the interest income you get is 100% taxed at your marginal rate.  So if your tax rate is 35%, for every $100 you get, $35 gets taken back at tax time from the government.  Which sucks, IMO.

There are a few different types of GIC’s that you can get.

Cashable GIC

  • Often the rates are crappier because you can pull the money you invested out at any time (and banks don’t like you doing that)
  • As of writing, the current 1 year cashable GIC interest rate is 0.30%
  • In my opinion, if you’re thinking of a cashable GIC, might as well plunk your money in a HISA instead
  • They have varying terms (how long you want to hold the GIC)
  • Can be simple or compound interest

Non-Cashable GIC

  • Varying terms
  • Usually higher rates than cashable GIC’s because they’re locked in for the term amount.  For example at ING direct, the 1 year rate is 1.25%, if you hold it for more than 1 year, the interest rate is higher
  • You have to pay a penalty if you want to redeem them before the agreed date
  • If you need money in the short term, again, might as well go with the HISA (High Interest Savings Account) to avoid any penalties

Equity-Linked GIC

  • This is where the granny panties are kicked up a notch
  • The GIC is linked to the market
  • Still 100% principal protected
  • At maturity, you may get MORE than what a typical GIC would get you
  • The downside is that it  may not be cashable until at maturity

Escalator Rate GIC

  • Usually longer terms (like three to five years instead of one)
  • The rates increase for each year of the term (for example Year 1: 1.2% Year 2: 1.75% Year 3: 3.5%)
  • Compounded interest is used
  • Usually for the last year of the term, they use a hot interest rate to entice you
  • Can be cashable but you are tempted not to cash out because of the said hot rate

What do you think of GIC’s?  What percentage of your portfolio includes GIC’s?  Do you agree that granny panties can be a staple in the wardrobe? (NOTE: No grandmas or granny panties were harmed in the making of this post)

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