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A fresh take on term deposits

They won't win the gold medal for heart-pounding excitement, but term deposits also called guaranteed investment certificates or GICs, can do a lot for your money.

In a sea of investment choices, term deposits are often overlooked. But when it comes to making a simple and safe investment, they're hard to beat. If you're looking to diversify an investment portfolio, save for a down payment or just keep your money growing, there's a term deposit option that fits.

It pays to know

Term deposits, are a secure and straightforward investment with a certain return.

When purchasing a term deposit, you know your interest rate, how long your money is tied up and how much you'll get back. The value of your investment won't go down, regardless of what the stock market or interest rates do. If you're saving toward a specific goal, such as a vacation or car purchase, you know well ahead of time what your return will be. You can't say that about many other investments.

Protection is paramount

Whether they're the traditional variety, cashable, escalator, or the latest index-linked varieties, term deposits all share two common traits: safety and security. In addition, the Credit Union Deposit Insurance Corporation (CUDIC)* of British Columbia, a statutory corporation, protects 100% of all credit union deposits.

Not all fixed income is the same

While financial experts would agree that a balanced portfolio should have a good helping of fixed income, not all fixed income is the same. Term deposits have a special place in the crowd. Here are a few features that set them apart from other investments.

No mystery at maturity.  When your term deposit comes due, you get back the principal you put in as well as a known and predictable rate of return

Low minimums. Term deposits can be purchased with small initial investments, often as little as $100. This makes them a great tool for getting children started on the road to saving money.

No fees. Term deposits are simple products, typically purchased without paying any extra fees.

Flexible interest. With term deposits you can compound your interest for higher growth, or receive regular interest payments monthly or annually. This can be particularly useful for seniors reliant on the investment income generated by their RRIF holdings.


Cashable options. If you need funds before maturity, cashable term deposits allow you easy access to your money. Having to sell other fixed income investments at the wrong time to raise cash could mean losing money. This makes cashable term deposits a good choice to hold funds for emergencies or other short-term goals. Just remember to review what you're investing in; cashable term deposits normally pay a lower rate of interest than the locked-in variety.

Anchoring your portfolio

With interest rates continuing to hover at historic lows, it's a good bet that term deposits won't build your wealth as quickly as some riskier investments. But they'll shine when it comes to protecting your savings.

When financial markets unraveled in the fall of 2008, investors holding term deposits were spared much of the fallout. By maintaining their value when most other investments were dropping, term deposits proved their worth as a diversification tool.

Because they lower your risk, term deposits can add value to a balanced portfolio. Research has shown term deposits to be more stable than many other investments, reducing your portfolio's exposure to market volatility and smoothing out returns.

Adding term deposits to your investment mix can be a particularly smart move if you expect to retire in the next few years.

Many pre-retirees were too heavily leveraged in equities before the market meltdown, learning a painful lesson on how important the right asset allocation and diversification are to your financial health, especially as you age. Losing capital just before your retirement leaves very little time to make up for losses. A shrunken investment pool means your portfolio has to work that much harder to recover. Lose 20% and you'll need a 25% gain on what's left, just to get back to even.

However, for those with a longer term investment horizon, it's often not the best course of action to rely solely on term deposits to build your retirement nest egg. Engage your financial advisor to help you understand your goals and risk appetite to determine the right investment mix for you.

A taxing problem

Like other interest-paying investments, term deposits are taxed at the highest marginal rates. To avoid losing a good chunk of your investment income to taxes, make sure you're using all the available tax shelters effectively.

Interest income earned from term deposits held within your RRSP grows tax-exempt. The same holds true for the Tax-Free Savings Account (TFSA). If you haven't yet made a TFSA contribution, you can place up to $5,500 in a term deposit annually and won't pay any tax on the interest you earn.

Managing your investment through "laddering"

If you're an experienced term deposit investor, you know the risk of having all your funds mature at the same time. By building a term deposit "ladder" you can step up to overcome these obstacles.

Begin by spreading your investment equally among a mix of shorter and longer terms, say from one to five years. Going out five years with a portion of your money means you're locking in the better rates available from longer durations.

When your first term deposit matures, simply reinvest, this time in a new five-year term. By following this strategy year after year, here's how you'll benefit. If rates go up, your renewing funds can capture the higher rates available on new term deposits. But if rates fall, the bulk of your investment still remains locked in, protecting your overall return. What's more, because a part of your investment matures each year, you can access a portion of your funds if needed.

Laddering is a winning strategy to manage your term deposit investments. You'll reduce interest rate risk and get the most out of the rates that are available in the market.

Escalator term deposits are a way to ladder your investments. They have built-in rate increases so your money grows more each year - automatically. And they're cashable on each anniversary date, so you can access your money when you need it.

Market–linked term deposits: market potential without the risk

A little nervous about the stock market but still like its potential? Consider a market-linked term deposit.

A market-linked term deposit combines the security of a term deposit with the growth potential of the stock market. You get the potential for high growth without risking your principal investment.

Like standard term deposits, you are guaranteed the full amount of your deposit at maturity. However, unlike standard term deposits, no final interest rate is specified at the time of your deposit. The rate of return is dependent on the performance of the stock market indices or basket of specific securities to which the deposit is linked. The good news? You can't lose money if markets drop, and if they rise you win. But there is a price for this security; you usually won't receive all of the market's upside.

If you haven't asked lately how term deposits can complement your investment plan and round out your portfolio, take a closer look and speak with your BlueShore Financial financial advisor.

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* Deposits are 100% guaranteed. Protection provided by the Credit Union Deposit Insurance Corporation of British Columbia.

Mutual funds are offered through Credential Asset Management Inc. Mutual funds and other securities are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured nor guaranteed, their values change frequently and past performance may not be repeated.