Often overlooked or under-appreciated, Guaranteed Investment Certificates (GICs) offer unique benefits and play an important role in many investment plans. On their own, they provide security and predictable income. As part of a diversified portfolio they also deliver stability and growth, especially when interest is compounded within tax-sheltered plans such as RRSPs, RRIFs and LIFs.

Security

GICs come with a variety of terms and features, including cashable options. No matter what your selection, all GICs have one advantage in common: guaranteed return of principal. At the end of the term, you will receive the full amount you invested. As many investment gurus have noted, GICs may not make you wealthy but they ensure you hold on to your hard-earned money.

In addition to principal guarantees, as a GIC holder, you are protected against the insolvency of the issuer by Canada Deposit Insurance Corp. (CDIC), Assuris or a provincial deposit insurance organization, within their respective limits.

Predictable income

With most kinds of GICs, a fixed rate of return is also guaranteed so you can count on regular income regardless of what the markets are doing. This makes it easier to plan for cash needs during the year or when your investment matures. Working with a deposit broker, you can arrange to receive income as monthly or annual payments, or have your interest compounded to the end of the term.

Stability and growth

When combined in a portfolio containing other types of investments, there is no disputing the contribution made by GICs through market cycles. Thanks to their guaranteed principal and returns, you can be sure that part of your portfolio is always producing - even in market downturns. By balancing the more volatile investments, Guaranteed Investment Certificates also help stabilize the value of your portfolio from year to year. Consider too that GICs help fill the fixed-income component of your portfolio with no MERs and no commissions.

Through a proven strategy known as GIC laddering, or staggered maturities, you can further enhance returns in the GIC component of your portfolio and achieve greater growth while also reducing risk. Here's how it works.

You start by dividing the amount you have to invest into five equal parts and then reinvest the cash into five GICs with terms of one, two, three, four and five years. Each year, when a GIC comes due, you reinvest in a five-year GIC. Soon, you'll have all your money in five-year terms, which generally pay higher interest than GICs with shorter terms. In addition to providing greater potential growth, a GIC ladder offers liquidity - ensuring you have access to 20% of your money each year for planned or unplanned expenses. By diversifying maturity dates you also reduce timing risk - the risk of having to reinvest all your money in a year of unfavourable interest rates.

A deposit broker can help you implement a laddering strategy and select the best GICs and rates from a network of financial institutions, all without fees or commissions. Shopping around on your behalf, your broker can save you time and make you extra money - up to 1% more than retail bank-posted rates. Seemingly small differences really add up. On a $60,000 deposit over five years, that's as much as $3,000 more in earnings - guaranteed.

Don't underestimate the value of GICs as a solid foundation for your financial security. Make GICs part of your investment plan.

Copyright © 2007 The Federation of Canadian Independent Deposit Brokers. All rights reserved.