Welcome back to our Investments at a Glance summer series. Today, we continue our discussion of cash and cash equivalent investments, with a look at GICs and money market funds.
A guaranteed investment certificate (GIC) is a deposit certificate issued by a financial institution
GIC terms typically range from 30 days to 10 years. You can buy them at banks, trust companies and credit unions. There are no fees or commissions involved in the purchase of GICs.
Most GICs pay a fixed rate of interest. Some GICs are linked to a stock market index, and the rate of return may vary based on the index’s performance of an index.
GICs are guaranteed by the issuer. The principal may be insured up to certain limits by a deposit insurance agency like the Canada Deposit Insurance Corporation. As a result, there is very little risk that the principal will not be repaid. However, if the GIC’s return is tied to an index, there may be a risk that interest payments will be lower than expected or there may be no interest payments at all.
Most GICs must be held to maturity but some may allow you to redeem early, though you may have to pay a fee to do this.
A money market fund is a mutual fund that invests in short-term fixed income securities.
Money market funds are usually issued at a fixed price of $10.00 per unit or share. The return you receive will vary depending on the investments the fund holds. In general, returns follow current short-term interest rates.
Most money market funds are usually low risk because they invest in high quality short-term securities. Others may invest in riskier securities to increase returns.
We will talk more specifically about how mutual funds work in future weeks, when we get to discussing investment funds.
This has been the third post in our Investments at a Glance summer series. Next week, we look at fixed income securities.
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