A guaranteed investment certificate (GIC) is an appealing option because the investor is assured to receive their initial investment plus any interest after the specified contract period. For this reason they are purchased by people who want a good rate on their return but do want the risk of losing money with products such as stocks, mutual funds, or bonds.
While the concept of getting a guaranteed return on an original investment no matter how the market is performing is satisfying, it is understandable to want to get the best payment possible at the end of the term. Below are ways that you can maximize the amount that you receive back when purchasing GICs.
1.Get the best rate
Because the return that you receive at the end of the term consists of your original investment plus any interest earned, you need to find the best interest rate available to maximize the amount you get back. While bigger institutions offer the same interest rates give or take, you definitely do not need to settle for these. Go online and consult with some websites that compare rates of many different institutions. These websites list and compare rates of many smaller banks, online institutions, credit unions, and life insurance companies that are known to give interest rates that are significantly more favourable than larger banks.
Another way to secure the best GIC rates is through a broker. These brokers have experience in searching the market for better interest rates and are skilled in getting customers the best available. You do not have to pay these brokers either because they are paid by the institution whose products they refer you to.
2. Do not cash in early
This can be easier said than done sometimes as emergencies and cash shortages can warrant cashing in on GICs early, but if you refrain from doing so until the end of the term you will get the best return possible. Cashable or redeemable GICs allow you to cash in early without paying any type of penalty, but a regular GIC may mean you will have to pay.
Depending on how much your original investment is, this may equal you forfeiting most if not all of the interest meaning that your investment venture will hardly have been worth-while. Unless you are facing serious financial hardship, waiting for your contract period to end will guarantee that you receive your principle investment back as well as the most amount of interest possible under the original agreement.
Laddering is the process of purchasing a number of GICs and spacing out maturity dates. Having GICs maturing each year means if interest rates increase, all investments stand to gain and you can roll money earned into a new investment if desired. If rates decrease, not all investments will be affected and your other GICS would still have benefitted from the original interest rate that was higher. This strategy allows you to avoid cashing out early because you can access some of your money every year.
4. Compound interest
The GIC that you purchase will certainly have an interest rate attached to it but the kind of interest it is will affect the return you receive at the end of the term. GICs usually offer one of two types of interest rates, simple or compound. Simple interest means the financial institution only pays interest that is based on the initial investment.
Compound interest means that the institution adds interest to your principal and additional interest can then be accrued based on this new amount. This means you are earning interest on top of interest, amounting to an increased return for you when the contract period expires.