GICs are often overlooked - even disparaged - in the search for investment alternatives. This is a mistake. Let's take a quick look a the feature and benefits of Guaranteed Investment Certificates.

GICs are very straightforward and predictable, and thus easy to understand and manage. GICs offer a reasonable return for very low risk. As well, GIC performance can easily be improved.

The Features and Benefits of GICs

• Simple and Predictable

Perhaps the greatest benefit of classic GICs--those without special features such as links to stock markets--is that they are straightforward and predictable.

When you make your investment decision, you know exactly what to expect: you know the payment dates and amounts, and the maturity date and value.

Nonetheless, you have great flexibility in terms of the size of your investment, maturity, and payment schedule. As well, you can purchase your GIC from any of a number of sources, including financial institutions and agents such as stockbrokers and deposit brokers.

• Easy to Understand and Manage

The straightforward and predictable features of GICs make them easy to understand, and it is not difficult to remain up to date.

GICs are also easy to manage. You can track expected payments and maturities with a diary. To calculate the value of your investments, you add up the principal amounts.

• Low Risk

GICs, like all interest-earning investments, are exposed to risk from insolvency, interest rates, and inflation.

The insolvency of the issuer would jeopardize your interest and principal payments. You can virtually eliminate this risk by selecting instruments that qualify for CDIC insurance.

Interest rate changes affect the value of an interest-earning investment: as rates fall, the value increases, as rates rise, the value falls. Although GICs are technically exposed to this risk, the variations are not obvious, because GICs are not usually traded. GICs are thus very useful if fluctuating values make you nervous. Of course, when your GIC matures, you receive the entire principal.

Inflation can have a serious impact on the value of an interest-earning investment. However, it affects all fixed income investments, so it cannot be used to distinguish GICs from other assets. Moreover, the impact can be limited by the strategy used to handle the reinvestment of principal.

• Flexible Reinvestment

An important issue for any instrument that earns interest or matures is what you do with the money you receive. If you are unable to reinvest this money at an attractive rate, the return on your investment suffers.

Compound GICs remove this problem--if you don't need the income--by ensuring automatic reinvestment.

At maturity, you'll need to find a new investment for the principal. You can limit your exposure to market changes by ensuring that only part of your portfolio matures at any one time.

• Manageable Liquidity

Liquidity is the ease with which you can trade your investment for cash, and whether you receive the full value.

GICs are not particularly liquid if they are not redeemable: in general, you must hold the instrument to maturity. However, if the GIC is transferable, it can be sold. You can cash a redeemable GIC, but you'll lose some of the interest.

You can manage the liquidity, though, by selecting the appropriate timing.

• Flexible Timing

Timing is the length of time that you should expect to hold an investment, even if it is possible to sell the investment earlier.

The timing of a GIC is its maturity. If you have a short investment horizon, you can select a short-term GIC.

• Low Fees

Fees can have an immense impact on the return on an investment. GICs usually do not involve fees, and commissions to a broker are not deducted from your return.

• Fully Taxed

GICs earn interest, which is taxed at the highest rate.

Tax on interest is payable even if it is not received. Compounding GICs are thus best suited for RRSPs or investors who can pay the tax with other funds.

• Competitive Return

The return on GICs is competitive, predictable, and reliable. It is not the highest possible return, and it is limited to the promised interest rate, but it is a reasonable return given the very low risk.

Making the Most of Your GICs

There are three things you can do to improve your GIC performance: buy insured GICs, build a ladder, and shop.

• Insure Your GICs

The CDIC provides insurance of $60,000 per depositor per institution. The insurance covers both deposit accounts and qualifying GICs against the bankruptcy of the issuer. RRSP and other specialized accounts are insured separately.

To obtain the maximum protection, ensure that the GIC is insured, has less than five years to maturity, and does not cause your total balance (including interest) to exceed $60,000--even if you are offered a higher rate on a larger GIC.

• Build a Ladder

To limit your exposure to interest rate and inflation changes, and to provide occasional liquidity, build a ladder. A ladder is a series of investments that mature at regular intervals. For example, 1/5th of a portfolio may mature each year for five years; as each GIC matures, it is invested for five years to maintain the ladder.

Five-year ladders are commonly recommended because they enable you to obtain the usual interest rate premium for longer investments while remaining within the insurance limits.

Interest rates will vary, and each year you will invest the maturing GICs at the new rates. If rates are rising, you'll get some of the benefit; if rates are falling, the bulk of your portfolio is still insulated.

• Shop for the Best Rate

To obtain the best rates on GICs, you should shop. You can contact the institutions, select from GICs offered by a stockbroker, or use a deposit broker.

A deposit broker is paid by the institution, so there is no direct cost to you. A good broker can offer a very wide selection of GICs, monitor the insurance limits, and help you maintain a ladder. A deposit broker can also manage all of the paperwork, track your investments, and offer related financial advice.

Deposit brokers are not regulated, but the best are members of the FCIDB (www.fcidb.com). You can protect yourself further by making the cheque payable to the institution that issues the GIC.

Are GICs the Ultimate Investment?

GICs are not appropriate for all investors in all circumstances. You may seek other investments for higher returns, better trading opportunities, lower taxes, or other features.

However, GICs do provide a predictable, easy to understand, low risk investment with a reasonable return.

GICs may be perfect for you.

Copyright © 2004 The Federation of Canadian Independent Deposit Brokers. All rights reserved.