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Best Guaranteed Investment Options

In times when the equity markets are volatile and full of uncertainties, chances are you might be looking for something with a guarantee. Typically when the word guarantee is used, investors are referring to the guarantee of capital and that the initial deposit will not be lost. For instance, if you invest $100,000, then you will continue to have the principal no matter what happens to the markets, economies, or interest rates. The basic idea here is to give yourself the upside potential of the stock market without the downside risk. Here are some popular guaranteed investment strategies to consider.

What is a GIC?

A Guaranteed Investment Certificate, or GIC, is a Canadian investment that offers a guaranteed rate of return over a fixed period of time, and is most commonly issued by trust companies or banks. Due to its low risk profile, the return is generally less than other investments such as stocks, bonds, or mutual funds. The rate of return on a GIC varies depending on various factors, such as the length of the term and specified interest rates from the Bank of Canada. At the time of purchase, the rate is higher than the interest on a savings account. If the savings interest rate becomes higher than the GIC rate of return, the return on investment will be low. Otherwise, there is potential for the return on investment to be quite high. The principal amount is not at risk, unless the bank defaults.

What is a Laddering GIC Strategy?

A laddering GIC strategy gives you fixed income in the short term plus the higher interest rates of a long term GIC. Start by dividing the amount you have to invest into five equal parts. Then, invest that money into five GICs with terms of one, two, three, four and five years. Every year when your GIC matures, reinvest in a five year GIC. Soon, you will only have five year term GICs maturing every year, giving you regular liquidity and decent interest rates.

What is a Redeemable GIC?

Redeemable GIC is one example of a conventional GIC in which the GIC is redeemable at any time with an interest rate payable based on the length of the investment. This investment product is great for investors who know they will need cash but are not sure exactly when. The investment horizon is normally a one to five year term. It offers minimum risk and requires only a minimum deposit of $1,000 for one year or more or $5,000 for less than one year. Interest is compounded annually on the anniversary date and payable at maturity. A reduced interest rate is then applied to the portion of the principal redeemed. This rate will be based on the term elapsed as posted at the branch. No interest is paid if the GIC is redeemed during the first 30 days after the issue date.

What is an Index Linked GIC?

Index linked GICs are a safe and less risky way to benefit from the potential returns of investing in stock markets. The principal is 100 percent guaranteed and the return is dependent on the performance of an underlying index, such as the Canadian or global market indices. Investors can choose between a three or five year terms with a low minimum deposit of only $500. You can have access to your funds at maturity only. Most financial institutions do not offer a minimum performance guarantee. However, there are some that do offer a 1 to 2 percent performance guarantee. Other institutions offer a maximum performance guarantee at 30 percent on total return. This means if the stock market is up 40 percent, you will get a maximum of 30 percent.

What are Segregated Funds?

A segregated fund is an investment fund that combines the growth potential of a mutual fund with the security of a life insurance policy. Like mutual funds, segregated funds consist of a pool investment in securities such as bonds, debentures, and stocks. The value of the segregated fund fluctuates with the market value of the underlying securities. All segregated fund contracts have maturity dates, which are not to be confused with maturity guarantees. The maturity date is the date at which the maturity guarantee is available to the contract holder. Holding periods to reach maturity are usually 10 years or longer. Guarantee amounts are offered in all segregated funds whereby no less than a certain percentage of the initial investment in a contract. Usually 75 percent or higher will be paid out at death or contract maturity. In either case, the annuitant or their beneficiary will receive the greater of the guarantee or the investment's current market value

Guaranteed investment have some advantages. Although safe, they're not as conservative as money market funds. Therefore, they generally pay adequately, usually more than money market funds and CDs, and actually closer to short-term bonds. Because most insurance companies are financially strong and sound, the "guarantee" should not be much of a concern.

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