In Canada, a Guaranteed Investment Certificate or GIC is an investment normally issued by banks, credit unions, or trust companies. The institutions will offer a guaranteed rate of return over a fixed time period. People tend to purchase GICs as part of their retirement plans because they offer a low risk rate of return. Because of its low risk, they are apt to receive a lower return than other investments such as mutual funds, stocks, and bonds. If for some reason a bank defaults, it is only the principal that is at risk,

How Guaranteed Investment Certificates Work

When you buy a Guaranteed Investment Certificates (GIC) from a financial institution, the institution pays to borrow your money for a specified time period. The period can be months or years. The end of the time period is called the maturity date. You must agree to the terms and conditions specified by the institution. For instance, the set term of the investment can be as little as 30 days, one year, or up to 10 years. You select how long you want the time period to be. Most people purchase GICs for one, three, or five years.

A certain amount of money has to be invested in the GIC. It is generally at least $500.00. You will be paid the interest that is accrued over the time period. Therefore, if your GIC is set for ten years, you will make more of a return in interest over the time period. The less time period, the less interest you will receive. It is important to remember if you take your money out before the end of the set term, there may be a penalty or early withdrawal fees. You may even not receive any interest. However, there are some GIC options that will allow a certain portion of the interest to be paid each year if you have a term that is set at a certain number of years.

You can normally receive your interest payments monthly, every three months, or once or twice a year. If you choose a monthly payment, interest payments will be lower.

Types of Guaranteed Investment Certificates (GICs):

Each financial institution may design their own GIC packages for their clients with different options, but there are two main types of GICs.

1. The safest GIC investment is one where an interest rate is set for the specified period of time. This is known as a fixed rate. Your money will be used at a specified interest rate that will not fluctuate with the market conditions. Because interest rates often change, always check to make sure that you are getting the best rate.
2. Purchasing GICs where the interest rate is based on the conditions of the stock market, rates will vary according the market conditions. It gives the investor a chance to possibly have a higher interest rate thereby earning more if the market is doing well.

What the Bank does with your Money

The bank takes the amount you invested in the GIC, and lends it to other financial groups. The bank will charge a much higher interest rate than the rate that they are paying you. The bank makes its money from the higher interest rate charged to their borrower. The difference between what they pay you and what they charge the borrower allows them to make a profit

It is important to remember that with GICs, the bank\'s costs are factored into the price you pay. So, when comparing investment options, you have to look at what the total return would be on a GIC. As well, Guaranteed Investment Certificates are considered lower- risk, not no-risk investments. When your investment depends on market conditions, risk is higher. However, you will not lose the principal. Also, taxes on GIC interest that you receive tend to be high.

We all want to make the right choices when planning for our future, especially our retirement. Guaranteed Investment Certificates are a great way to make an investment with lower risks.