Finding a balance with market-linked term deposits or GICs
With any investment, there's always a fine balance between achieving a strong return and minimizing your risk. You may be intrigued by investing in the stock market, but nervous about its volatility. If that's the case, a market-linked term deposit or GIC might be right for you.
What is a market-linked term deposit or GIC?
First, it's important to know that a term deposit and a GIC are different names for the same kind of investment, one that's held at a financial institution for (typically) a fixed length of time–anywhere from a few months to five years or more. It's a no-risk investment* with a secure, albeit conservative, rate of return.
A market-linked term deposit or GIC is one where the rate of return is linked to the stock market and therefore offers potentially higher growth. Your principal is guaranteed, but the performance of the market determines how much money you'll make at the end of the term.
In essence, a market-linked term deposit or GIC takes some of the risk out of investing while capitalizing on the stock market's potential.
How it works
The rate of return calculation varies depending on the specific market-linked term deposit/GIC product. However, for a basic understanding the rate of return is determined by the average of the stock market indices (based on specific evaluation dates). It is then compared to the starting value of the index to determine the percentage change. When your market-linked term deposit/GIC matures, your principal is returned, plus any market-related returns.
Some market-linked products offer a guaranteed minimum return in addition to principal protection. Others may offer an even greater earning potential but do not offer a guaranteed minimum (still with principal protection).
Balance risk and reward
While the returns from market-linked term deposits or GICs may not be as high as what you might get by playing the stock market, you can rest easy knowing you won't lose your principal no matter how poorly the stock market performs.
Market-linked term deposits and GICs are generally RRSP, TFSA and RESP eligible, making them another tool for reducing your taxable income. Eligibility varies among the different market-linked products, so be sure to consult your advisor for specifics.
Although you can track your market-linked term deposits' current performance online, there's no way to calculate exactly how much money you'll earn until the term expires. If you're banking on a steady injection of cash, you may want to consider an alternative low-risk investment, like a high-interest savings account.
Testing the waters
If your money is sitting in a savings account earning a modest rate of interest, and you're looking for some low-risk growth potential, a market-linked term deposit or GIC might be right for you. Plus, it's a good way to delve into or re-enter the stock market and diversify your investment portfolio. Another benefit: you won't need to pay any administration fees or commissions like you do when you purchase mutual funds or stocks.
Talk to one of our financial advisors today about how these term deposits may play a role in your investment portfolio.