The Middle Ground Between Cash and Investing

A few years ago, I found myself in a bit of a grey area. I had some money sitting in my savings account, but I was not sure how the market was going to perform. At the same time, I did not know if I might need that cash for something like replacing my car or making a lump sum payment on my mortgage. I went back and forth between investing it or putting it into a GIC.

A GIC, or Guaranteed Investment Certificate, is a type of investment where you deposit money for a set period of time and earn a fixed rate of return. For example, if you invest $100 in a one-year GIC at a 3 percent interest rate, you will receive your initial $100 back plus interest at the end of the term.

Here is what that looks like after one year:
•    Principal investment: $100.00
•    Interest earned: $3.00
•    Total amount at maturity: $103.00

For a one-year term, interest is usually calculated as simple interest and paid at the end. The return is guaranteed, which is where the name comes from.

At the time, GIC rates were fairly attractive, around 5 percent. Today, they are typically in the range of about 2.35 percent to 3.65 percent for a one-year term. I used GICs when I was younger, but over time I realized that the returns were often lower than what I could earn in the market. Also, 100 percent of the interest from a GIC is taxed as income, which can reduce your overall return. In comparison, only 50 percent of capital gains from investments like mutual funds, ETFs, and stocks are taxable.

While looking into GIC options, I came across something called market linked GICs. These are designed for more conservative investors who still want some exposure to the market. Market linked GICs combine the security of a traditional GIC with the potential for higher returns tied to the performance of a stock market index, such as the S&P/TSX 60.

Here is how they generally work:
•    Principal protection: Your initial investment is guaranteed and returned at maturity.
•    Variable returns: Instead of a fixed rate, your return depends on how the market performs. If the market goes up, you earn a return. If it goes down, you typically just get your original investment back.
•    Participation rates and caps: You usually do not receive the full market return. For example, you might receive 80 percent of the gain, or there may be a maximum total return over the term.
•    No early access: These are typically locked in until maturity (typically 3 or 5 years).
•    Minimum return: Some products offer a small, guaranteed return, but not all do.

There are a few clear pros and cons.

Pros include principal protection, the chance to benefit from market growth, no fees, and CDIC coverage (insurance provided by the Canada Deposit Insurance Corporation, a government corporation that protects your money if the bank fails).

Cons include capped returns, no access to your money during the term, returns are often taxed as interest income if it’s not in a registered account, and the possibility that returns may not keep up with inflation.

I decided to try one myself and committed to a three-year term that lined up with my mortgage renewal. In the end, I earned a 20 percent return over those three years, which was much higher than what a regular GIC would have offered at the time.

That said, this type of return is not guaranteed. It depends entirely on how the market performs during the term. Still, I found it to be a useful option for someone who prefers the safety of a GIC, does not need access to their money for a few years, and wants the potential for a higher return without directly investing in the market. It can also make sense if you know you will need the funds within a set time frame and do not want to worry about when to sell the investments. These may also be a good fit for someone like my mom, who is risk averse and only invests in GICs, but now can have a potential for a higher rate of return when the current GIC interest rates aren’t the most favourable.

Disclaimer: This is for general information only and is not financial advice. Please do your own research or speak with an investment advisor at your local bank before making any investment decisions.