Guaranteed investment certificates (GICs) are back on investors’ radars as their rates of return rise – but given skyrocketing inflation and that means money invested in GICs is still ultimately losing the purchasing power.
However, finance experts say these investment vehicles can still be a good option for Canadians in certain situations.
“If people want to lock in some of their money – keeping capital safe – knowing that they’re not making a lot of money or even losing once inflation is taken into account, GICs are an attractive option in today’s environment,” Mona Heidari, financial advisor at Vancouver-based BlueShore Financial, said in a phone interview.
Ratehub.ca shows that one- and three-year GICs now offer returns above 4%, while some five-year GICs offer returns above 5%.
GICs are investment vehicles that generally lock up an investor’s money for a set term and pay a set rate of interest income. Some GICs may be cashable but would have a lower return. One of the key aspects of a GIC is that the money invested is, as the name suggests, guaranteed, making it a very low risk option.
WHEN GICS ARE THE BEST
Frank Gaspar, founder and wealth advisor at CSR Wealth Management, said he would generally consider a GIC if a client is saving for a specific short-term purpose and cannot afford to lose money.
“If you’re saving for a vacation that’s next year, or a vacation on your to-do list that will take two or three years to save up for, this would be a good reason to consider getting a GIC. “, did he declare. call.
For emergency funds, he wouldn’t recommend GICs unless they’re redeemable, since emergency fund money is supposed to be immediately available to the investor.
“If you have short-term expenses, medium-term expenses, and you don’t want to lose your capital, you look for interest-bearing investment vehicles that give you protection on your capital,” Heidari said.
“I believe there is always a place for GICs in a portfolio, even during periods of very low interest rates. And looking at the last three, four years, a lot of people still hold GICs because they couldn’t afford to risk the capital they have.
With interest rates the highest they’ve been in recent memory, she also suggested that some investors might be worth considering a longer-term GIC to lock in the current high yields, if they know they won’t need the money during this time.
TAXES CUT BACK
It’s not just inflation that can erode GIC returns – taxes are also a big factor.
When not held in a tax-sheltered account, such as a Tax-Free Savings Account or Registered Retirement Savings Plan, interest income from GICs is taxed at the rate investor’s highest marginal tax rate.
“If you earn 4% on a GIC with non-registered money, and you’re in a 40% tax bracket, you lose 40% of that interest income to taxes. So you’re not really earning 4% on your GIC and again inflation is 7.5% — you do the math — you’re losing quite a bit of money in that GIC,” Heirdari said.
GICs can be held in registered accounts, but an investor would be limited by their contribution limits, she added.
For investors who might be considering an alternative, Gaspar suggested bond funds or segregated funds, which are similar to a mutual fund but come with a capital guarantee.
Meanwhile, Rob Townsend, managing director of Calgary-based Camber Capital Private Wealth, said investors need to think about three things: do they need the money, why do they need the money and how much? money do they need.
“It can help you understand which products could be used to have the highest likelihood of getting the results you’re looking for,” he said over the phone.
While each investor’s risk tolerance and ability to withstand risk is different, Townsend pointed out that historical data shows that Canadian equities have outperformed cash or short-term fixed-income investments over a five-year period. 73% of the time.
“You could define it as taking a five-year bet to make money with a 73% chance,” he said.
Sometimes investors may opt for GICs for psychological reasons, he added – since equity investors will suffer losses in times of volatility, but GIC investors only see their rate of return forgetting that they have lost purchasing power.
“Nothing is free in this world. Risk and reward are always linked. If they give it to you as collateral, you’re giving up something,” Townsend said.
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