Banker's View : What to look for when getting a GIC - Guaranteed Investment Certificate / Term Deposit

Guaranteed Investment Certificates 

 Term Deposits 

What do GIC's / Term Deposits provide you with?

1. The rate of return is known from the investment, 100% guaranteed 
2. The length of the term is known 
3. The Principle (money you invested) is 100% protected unlike stocks or mutual funds

Opportunity Cost 

1. Some GICs are cashable while others are not, however which ever way you look at it you might not have access to your funds during some or all part of the year. The window that allows you access to your funds is very small, unlike mutual funds.
2. Simply put, low rates. That is the biggest drawback. 

Who is the biggest enemy of a GIC...Inflation...

Lets says if you bought groceries that cost you $100 dollars in 2012, same groceries will cost you $102.87 in 2014. 

That is a massive increase of 2.87% in inflation. Meaning you purchasing power went down. 

So if you invested into a long term GIC, lets say 5 years locked in, at 3.25%, you will not be able to beat inflation. (Refer to previous blog http://bankersviewpersonalfinance.blogspot.ca/2014/12/why-have-mutual-funds-as-part-of-your_28.html). Therefore, a GIC which is cashable end of every year is a better options. 

This is what I call riding GICs

Example: 

GIC #  1

3 year rising rate GIC cashable every 12 months on anniversary

1  yr 1.5%

2 yr 2.2%

3 yr 2.9%

Lets say, you got the GIC on Jan 1 2015. You have the option to cash it out after 12 months, which is Jan 1 2016. 

Lets say the rates of are getting better and there is a new GIC that your financial institution is offering at 5% 2 year locked in. It is much better than the rate you would get for leaving the money in teh gIC for the second year, which is at 2.20%. So if you keep an eye on the rates and know when your GICs are cashable you can ride on to the next GIC at the best rater.