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Term Deposit Vs GIC: Understanding the Differences 

4 min read

Term deposit vs GIC

Written By

Clay Shiffman

Are you torn between a term deposit and a Guaranteed Investment Certificate (GIC) for your next investment? While both offer secure avenues to grow your savings, they have distinct advantages and limitations. Finding the right strategy will help you safeguard your finances during economic downturns.

Term Deposits provide flexibility and ease of access, but often at lower interest rates. On the other hand, GICs promise higher guaranteed returns, yet with stricter access to funds. Navigating these differences is key to aligning your investment with your financial goals.

In this guide, we dissect term deposits and GICs to reveal how they work, their benefits, and their drawbacks. We cover everything from understanding their role in financial planning to comparing their interest rates.

What is a Term Deposit?

A term deposit is a secure financial product where you deposit a certain amount of money with a bank or financial institution for a predetermined period, earning fixed interest. It's a hassle-free way to grow your savings without the volatility associated with stocks or real estate.

Key Features of Term Deposits

Let's dive into some of the key term deposit features that make them a go-to for risk-averse investors:

  • Guaranteed Growth: Your principal amount earns a fixed interest rate, ensuring your investment grows steadily over time.

  • Safety Net: Protected by provincial deposit insurance, your investment is secure.

  • Fixed Terms: Options range from short 30-day periods to longer stretches up to five-year terms.

  • Interest Rates: Generally offer higher rates than traditional savings accounts, though they might not always outpace inflation.

In managing personal finances, term deposits offer a compelling alternative to keeping surplus cash in a standard savings account. For those considering a deposit on a secured credit card as a means to repair or build credit, integrating a term deposit into your financial strategy can be beneficial. You get the security and growth potential of the term deposit while also improving your credit score through the secured credit card.

Types of Term Deposits

Several types of term deposits include:

  • Redeemable Term Deposit: Offers flexibility with the option to withdraw funds before maturity, potentially at the cost of forfeited interest or penalties.

  • Non-redeemable Term Deposit: Locks in your money for the full term, rewarding you with higher interest rates in return.

  • Growing Rate Term Deposit: Features gradually increasing interest rates over a five-year period, some with partial withdrawal options.

  • Index-Linked Term Deposit: Balances security with the chance for higher returns linked to stock market indices, offering a minimum guaranteed interest plus potential market gains.

What is a Guaranteed Investment Certificate (GIC)?

A Guaranteed Investment Certificate (GIC) is a stable and secure investment option that allows you to deposit your money with a financial institution for a fixed period, earning a predetermined rate of interest.

While some institutions refer to them as term deposits, GICs are essentially the same, with minor differences, in terms of duration. Despite their reputation for not being the most thrilling investment choice, GICs offer a solid foundation for both new and seasoned investors looking for guaranteed growth without the risks associated with more volatile markets.

Key Features of GICs

So, how does a GIC work? Let’s find out from its key features.

  • Guaranteed Returns: Your investment earns interest at a fixed or variable rate, ensuring a predictable return at the end of the term.

  • Security: GICs are typically insured, meaning your investment up to a certain amount is protected against institutional failure.

  • Flexible Terms: Typically, from one year to several years, choose a term that aligns with your financial goals.

  • Diverse Interest Calculation: Interest can be fixed, variable, or linked to market indexes, offering options for every risk appetite.

Types of GICs

GICs can be of many types depending on terms, interest rates, and other conditions, such as:

  • Fixed-Rate GICs: Lock in an interest rate when you open your GIC, guaranteeing the same return throughout its term.

  • Variable-Rate GICs: Interest rates tied to the bank's prime rate, offering the potential for higher returns as rates increase.

  • Step-Rate GICs: Enjoy increasing interest rates annually, ensuring your returns grow.

  • Market-Linked GICs: Combine the safety of GICs with the growth potential of the stock market, with interest earned depending on market performance.

  • Registered vs Non-Registered GICs: Choose between tax-advantaged accounts (like RRSPs, TFSAs) for registered GICs or more flexible, potentially taxable non-registered options.

  • Foreign Exchange GICs: Invest in GICs in foreign currencies, which is ideal for hedging against currency fluctuations or planning for international expenses.

Comparing Term Deposits and GICs: Pros and Cons

Navigating the realm of secure investments, Guaranteed Investment Certificates (GICs) and term deposits stand out as preferred options for those looking to grow their savings with minimal risk.

Both investment vehicles come with their own features, tailored to cater to diverse financial goals and preferences. Considering their advantages and drawbacks, let's explore how GICs and term deposits compare.

Advantages of GICs

GICs offer a sanctuary for your principal investment, shielding it from market volatility—an appealing factor for cautious investors. The essence of how GICs work lies in their ability to provide predictable outcomes; barring market-linked GICs, investors can foresee the exact return on their investment.

This predictability, coupled with a range of term lengths, makes GICs a versatile option for both short-term savers and those with longer horizons in mind. The set-it-and-forget-it nature of GICs is especially beneficial for those seeking to mitigate market risks without the hassle of constant monitoring.

Limitations of GICs

The tranquillity GICs offer comes with certain restrictions. The funds invested in GICs are typically inaccessible until maturity, imposing a penalty for withdrawing a GIC early. This could pose a dilemma for investors needing sudden liquidity.

Additionally, the interest rates on GICs, while stable, might not always outstrip inflation, potentially diminishing the purchasing power of your returns over time. This drawback underscores the importance of carefully selecting GICs, especially when mutual fund investments and other options might offer higher yields, albeit with higher risks and management fees.

Advantages of Term Deposits

Term deposits appeal to investors through their promise of fixed-rate returns, providing a shield against market fluctuations and guaranteeing the principal's safety upon the term's conclusion. Financial institutions offer term deposits with varying lengths, enabling investors to secure higher interest rates for longer commitments.

The availability of such deposits in diverse formats—including those linked to market indexes or escalating rates—adds a layer of customization to match individual investment strategies. Notably, term deposits are often eligible for insurance protection, such as the Canada PRO deposit, safeguarding investments up to certain limits.

Limitations of Term Deposits

The primary drawback of term deposits mirrors that of GICs: limited access to funds before maturity. While some term deposits permit early withdrawals, they often entail a financial penalty or a significant reduction in interest earnings.

Furthermore, the guaranteed interest rates, although stable, cap the potential for higher returns that could be achieved through mutual funds or stock investments.

For those considering market-linked term deposits, it's crucial to understand that while the principal investment remains protected, the returns fluctuate with market performance, offering a unique blend of security and growth potential.

Term Deposits vs. GICs: Which One to Choose

Deciding between term deposits and Guaranteed Investment Certificates (GICs) hinges on your unique investing goals and financial needs. Whether you're drawn to the higher interest of non-redeemable GICs or the flexibility of redeemable options, understanding the key differences can lead you to the best decision. Let's simplify this choice with a few considerations:

Investment Goals and Period

Are you planning for long-term growth or need short-term security? Non-redeemable GICs typically offer more interest for those willing to commit their funds for a specific period without access. In contrast, redeemable GICs and most term deposits provide flexibility if you anticipate needing your funds sooner.

Interest Rates

Different interest rates across these investment products can influence your decision. Longer commitments often yield more interest, appealing to those with a clear financial timeline.

Risk and Potential Returns

For those interested in potentially higher returns linked to market performance, market-linked GICs are attractive, balancing investment growth with principal protection.

Access to Funds

If you value the ability to access your investment, consider the terms associated with redeemable GICs and term deposits, noting any penalty for early withdrawal.

Insurance and Tax Benefits

Both GICs and term deposits are guaranteed investments, as generally covered by an authority like Canada Deposit Insurance Corporation, offering security up to a certain limit. Additionally, registered GICs can be included in tax-advantaged accounts like RRSPs and TFSAs, enhancing the tax efficiency of your investment.

Final Thoughts on Making Your Choice

Considering term deposits versus GICs, consider how each option fits within your broader financial picture. For example, if safeguarding your principal while earning a guaranteed return sounds appealing, a GIC might be the way to go.

On the other hand, if you value flexibility and potentially higher rates for longer commitments, term deposits could offer the balance you're seeking. Ultimately, focus on your financial goals, risk tolerance, and liquidity preference when deciding between GICs and term deposits.

Note: KOHO product information and/or features may have been updated since this blog post was published. Please refer to our KOHO Plans page for our most up to date account information!
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