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 The
Money Management Newsletter: GICs
and Fixed Income
Maximizing returns on GIC investments, compounding
and escalating interest rates
By the Money Management Editor
Money Management Newsletter - October 2004
Start early and invest often - The longer your investments
have to grow, the more opportunity you have to reap the benefits of compound
interest - is a standard investment mantra.
If you're not relying on your GICs as a source of regular income, then
opt for compound interest (View rate
chart) to maximize your return. Compound interest is the interest
that you earn on your interest. For example, if you invested $10,000 and
earned a rate of four per cent over one year, your interest would be $400.
If you earned four percent again the following year on the combined amount
of $10,400 you would receive $416 in interest. The extra $16 that was
earned on the $400 would be your compounded interest. Compounding interest
is a compelling reason to invest for the long-term.
Click here: To learn
more on compounding
Ladder the maturity dates of your GICs - This is one
way to diversify the GIC component of your portfolio to help you meet
your goals and reduce your risk. Laddering helps maximize your overall
return by structuring your GIC investment maturities so that you renew
them for the term with traditionally the
highest rate of interest – the five-year GIC – while giving
you flexibility and access to your funds. Here's how it works:
- First, you divide your total GIC investment into
five equal portions, and invest them in five different GICs - ranging
from one-year to five-year maturities. This way, one of your GICs will
mature each year.
- Each year as a GIC matures you renew it for five-years
if the funds are not required. This way you continue the ladder of one
GIC maturing annually to provide ready funds if needed but also earning
a higher average rate of return by using five-year renewal terms.
Click here: To
learn more on laddering
In addition to giving you access to some of your money
each year, laddering helps smooth out interest rate fluctuations and increases
your return potential by reducing the impact of interest rate dips.
Phyllis Arth
, Fiscal Agents' GIC investment specialist says "Some institutions
such as Advisors Advantage Trust or TD-Canada Trust offer automatic GIC
laddering" - a convenient solution for investors interested in this
strategy. She also advises, "don't be fooled by the high interest
rates offered in the final years of escalator or rate riser GICs. It's
the overall effective rate of return as indicated by the blended rate
or average rate over the life of the GIC that's important. This is the
absolute return for the time period - and the only rate that matters.
(See chart)
Note:
Investors who normally invest amounts close to the $100,000 CDIC insurance
limit should be mindful that the total principal and accumulating interest
remain insured.
(See CDIC
news release) ). GICs are not considered marketable securities such
as Canadian bonds and normally cannot be sold before maturity. (Exceptions
are available) Compounding certificates only offer tax relief if sheltered
in a registered investment such as an RRSP or RRIF. The interest earned
each year on a non-registered, compound-interest GIC must be reported
as income on your tax return, for the year earned, even though you will
not actually receive the money until the GIC matures.
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©
, Fiscal Agents Money Management Newsletter
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