Market-linked GICs are considered the riskiest type of guaranteed investment certificates (GICs), but can also be the most lucrative. They’re kind of a hybrid investment. Whereas with traditional GICs, your interest rate is set at the beginning of the term, the interest rates on market-based GICs are based on equity index performance.
As with all GICs, you’ll get your guaranteed minimum return, plus you have the potential to earn a higher-than-typical interest rate. Of course, things could also go the other way if the stock market goes down, and you may not see any gains. But because it’s a GIC, you’re still guaranteed to walk away with your principal with no losses.
Market-linked GIC vs. fixed-rate GIC
The difference between a market-linked GIC and a fixed-rate GIC is all about the potential interest you could earn.
Remember, with a GIC, you’re guaranteed to get at least your original investment back, as long as you let the GIC mature. When you buy a fixed-rate GIC, you know the interest rate upfront so you know exactly what you will earn by the end — there won’t be any surprises.
With a market-linked GIC, you have no idea what you will walk away with because the interest rate depends on stock market performance, which is unpredictable. This means you could earn much more than if you’d chosen a fixed-rate GIC, but it also means you could walk away with no gains at all. You won’t know how much you’ve made in interest until the GIC has matured.
What to look for when choosing a market-linked GIC
A market-linked GIC could be a great option for people who are willing to take a little more risk with their GIC investment. But before you jump on board, make sure to shop around and consider the following features:
- Maximum performance guarantee. Some products specify maximum returns that might be lower than the market return they are linked to. For example, if a GIC has a maximum return of 30%, that’s all you’ll get, even if the market goes up 40%.
- Minimum performance guarantee. While maximum returns are common, minimum guarantees are not, which means you might walk away with $0 in gains at the end of your term.
- Taxation. When you invest in the stock market, the money you earn is called capital gains. But when you invest in a market-linked GIC, the money you earn is called interest. Interest is taxed at a higher rate than capital gains, which means that choosing this investment option means you’ll pay higher taxes. Along the same lines, your market-linked GIC will not earn you any dividends, which you could be entitled to if you invested directly in the stock market.
- Liquidity. Market-linked GICs are locked in, so you cannot access your money before the term is up. If you might need to use this money in that time frame, a market-linked GIC is not a good option for you. A cashable GIC would be a better choice.
- Participation rates. A participation rate is a predetermined percentage of the correlation between the performance of the stock market and your GIC. Essentially, it means that your performance will not be based on 100% of the underlying stock market return — it might be 60% or 80%. Again, this means you will not earn as much as if you had invested directly in the stock market.
It’s also important to know what index your market-linked GIC is tied to. Some indexes or mutual funds may be riskier than others, so do your research before investing.
Pros and cons of market-linked GICs
A market-linked GIC might seem exciting because it’s a safe risk — the best of both worlds. However, it’s important to consider the pros and cons before you choose this type of GIC.
- Higher earning potential
- Still a safe investment, so your principal is not at risk
- Usually have maximum returns
- Not tax-efficient
- Not as liquid as other types of GICs
Are market-linked GICs redeemable?
Typically, no. You must wait until the GIC matures to access your money.
Can you lose money on a market-linked GIC?
You will not lose the money you originally invested, which is called your principal. However, you may not walk away with any gains.
How safe are market-linked GICs?
Market-linked GICs are risky compared to other GICs but are very safe compared to most other investments. You will not lose any money you invest. The risk is in whether or not you will earn any or not during the GIC’s term.