As interest rates have risen, so has the popularity of guaranteed investment certificates. Here are the basics:

What is a guaranteed investment certificate?

A guaranteed investment certificate offers a set rate of return while keeping the original amount of money invested safe, making it an attractive option for investors with a low risk tolerance. 

One of the key features to be aware of with GICs is your money is typically locked in for a specific period of time, referred to as a term. Terms are usually one-, three- or five-years, although shorter and longer terms are available. 

GICs can be held in virtually all investment accounts, including a tax-free savings account and registered retirement savings account. 

What are the main pros and cons of GICs?

One of the biggest attractions of a GIC is the fact that the money you invest and the rate of return are, as the name implies, guaranteed.

There are a variety of terms and interest rate options available to investors and deposits are covered by the Canada Deposit Insurance Corp.

“GICs are a suitable choice for investors aiming to preserve capital, and short-term savers seeking a secure and reliable return on their investments,” Alim Dhanji, a Vancouver-based senior financial planner at Assante Financial Management Ltd., said in an email. 

One of the biggest potential disadvantages of a GIC is the fact that the money is locked in, giving investors little flexibility if the cash is needed before it matures.

Another possible disadvantage is interest income earned from GICs is fully taxable, unless the investment is held in a tax-sheltered account such as a TFSA.

“While they can provide attractive interest rates, it's essential to consider the impact of taxes, as this may pose challenges in keeping pace with inflation over time,” Dhanji said. 

Why have GICs gained in popularity over the past year and a half? 

Since the Bank of Canada began its interest rate hiking campaign, return rates on GICs have risen in tandem.

Since these types of investments have such a low-risk profile, investors can now see returns north of five per cent, making them attractive relative to other investments, such as stocks, that may offer similar returns but are much more volatile.

If a GIC has decent returns with low risk, should I put all of my money into it? 

A diversified portfolio is key to managing the ups and downs that occur in financial markets and helps mitigate investment losses.

“Although GICs offer safety, they might not be ideal for all investors since they can restrict the potential for higher returns and growth,” Dhanji said. 

“It is generally advised to diversify your investment portfolio to align with your individual risk tolerance and financial objectives, and it may be wise to explore alternative investment avenues such as stocks, bonds, or real estate,” he added.

How do GICs stack up against other securities like fixed income or dividend stocks? 

GICs fall into the fixed-income asset class, along with bonds and shorter-term investments such as money market funds. GICs and bonds both offer predictable interest income payments.

“Bonds are a solid low-risk alternative to GICs as they exhibit flexibility in response to evolving interest rates, offering opportunities for potential capital gains if sold strategically before maturity,” Dhanji said. 

Dividend stocks, meanwhile, can be riskier but they can provide regular payouts and the potential for capital gains.