Investors who may need access to their funds before their maturity dates should purchase cashable or redeemable GICs—meaning that you can cash your investment at any time with no extra cost. Keep in mind that cashable GICs usually pay significantly less interest.
Types of GICs
There are a few different types of GICs—and understanding what each offers will help you decide which fits your investment needs best. The terms (amount of time you must agree to deposit your money) and interest rates can differ quite a bit. In all cases, though, your initial deposit is protected.
Fixed-rate GICs pay a predetermined interest premium each term. For example, $1,000 invested in a one-year fixed GIC at 2% interest will return $20 of interest plus the original $1,000. This type of GIC is the most commonly issued type. However, it offers no protection against inflation. In this scenario, if the inflation rate is 3%, the purchasing power of your GIC deposit plus interest will be $990 in real dollars, which is even less than the $1,000 you initially deposited.
Some GICs link interest payments to a fluctuating benchmark, usually the institution’s prime rate. These types of investments are called variable-rate GICs and will prevent you from missing out on potential interest-generated gains because your nominal returns grow as interest rates do.
Other GICs link interest payments to an underlying stock market index and are called equity-linked GICs. The interest rates on these are not determined until maturity. If the market underperforms, you may see no return except for your original principal, which is guaranteed.
Escalating-rate GICs increase the interest rate that you are paid over time. Let’s say you buy one that matures in three years. It might pay you 1.05% interest in year one, 1.20% in year two, and 1.65% in year three. These GICs give you a bigger incentive to not take your money out early, as it generates the best return in the last year of its term. Like fixed-rate GICs, this type does not protect against inflation.
GICs also differ based on how often interest payments are made. Issuers let you decide if you want to receive these payments monthly, semi-annually or annually—or they can be automatically reinvested until the maturity date.
Registered and non-registered GICs
GICs can be held in non-registered and registered accounts.