GIC rates are rising, but still lag behind inflation. When are they worth it? -BNB Bloomberg

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Guaranteed Investment Certificates (GICs) are back on investors’ radar as their rates of return increase, but when you factor in skyrocketing inflation, it means that money invested in GICs, ultimately, it continues to lose purchasing power.

However, financial experts say these investment vehicles may still be a good option for Canadians in certain situations.

“If people want to secure a portion of their money, keeping principal safe, knowing they’re not making a huge amount, if they’re not losing once inflation is factored in, GICs are an attractive option in the current environment. . Mona Heidari, financial adviser at Vancouver-based BlueShore Financial, said in a phone interview.

Ratehub.ca shows that one-year and three-year GICs now boast yields in excess of four percent, while some five-year GICs offer returns in excess of five percent.

GICs are investment vehicles that typically lock up investors’ money for a set period of time and pay a specified rate of interest income. Some GICs can be collected in cash, but would have a lower yield. One of the key aspects of a GIC is that the money invested is, as the name implies, guaranteed, making it an ultra-low risk option.

WHEN GICS ARE BETTER

Frank Gaspar, founder and wealth advisor at CSR Wealth Management, said he might typically consider a GIC if a client is saving for a specific short-term purpose and can’t afford to lose money.

“If you’re saving for a vacation that’s coming up next year, or a to-do list vacation that’s going to take two or three years to save up, that would be a good reason to consider getting a GIC,” he said by phone. .

For emergency funds, I wouldn’t recommend GICs unless they were redeemable, as the emergency fund money is meant to be immediately available to the investor.

“If you have some short-term expenses, medium-term expenses and you don’t want to lose your principal, you’re looking for interest-bearing investment vehicles that provide protection for your principal,” Heidari said.

“I think there is always a place for GICs in a portfolio, even at times when interest rates are very low. And looking at the last three or four years, a lot of people still have GICs because they can’t afford to risk the capital they have.”

With interest rates at their highest in recent history, he also suggested it might be worthwhile for certain investors to consider a longer-term GIC to lock in today’s high yields, if they know they won’t need the money during that time.

TAXES ARE EAT IN RETURNS

It’s not just inflation that can erode GIC returns—taxes are a big factor, too.

When not held in a tax-sheltered account, such as a tax-free savings account or registered retirement savings plan, GIC interest income is taxed at the investor’s maximum marginal tax rate.

“If you’re earning 4 percent on a GIC on unrecorded money, and if you’re in a 40 percent tax bracket, you’re losing 40 percent of that interest income on taxes. So you’re not actually making four percent on your GIC and again inflation is at 7.5 percent, you do the math, you’re losing quite a bit sitting on that GIC,” Heirdari said.

GICs can be held in registered accounts, but an investor would be limited by their contribution limits, he added.

GIC ALTERNATIVES

For investors who want to consider an alternative, Gaspar suggested bond funds or segregated funds, which are similar to a mutual fund but come with a guarantee on the principal.

Meanwhile, Rob Townsend, chief executive of Calgary-based Camber Capital Private Wealth, said investors need to think about three things: if they need the money, what they need it for and how much money they need.

“That can help you understand which products could be used to have the highest chance of achieving the results you’re looking for,” he said by phone.

While each investor’s risk tolerance and ability to resist risk is different, Townsend noted that historical data shows that Canadian stocks outperformed cash or short-term fixed income investments over a five-year period on 73 percent of the time.

“You could frame it as, would you take a five-year bet to make money with a 73 percent probability,” he said.

Sometimes investors may opt for GIC for psychological reasons, he added, as stock investors will see losses in times of volatility, but GIC investors only see their rate of return and forget that they have lost purchasing power.

“Nothing is free in this world. Risk and reward are always related. If they give it to you as collateral, you’re giving something up,” Townsend said.


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