Higher interest rates have caused the popularity of Guaranteed Investment Certificates (GICs) to surge in recent years. If you’ve bought a GIC recently, it may be maturing soon. This presents you with a new opportunity and a decision to make. Let’s look at five key factors to consider when making your decision.

Risk Tolerance

We often think of GICs as low-risk investments, where both the original investment and the rate of return are guaranteed. In terms of volatility and principal protection, GICs are very low risk investments. But the flip side is that you’re also likely to receive a relatively low rate of return, and poor tax efficiency. This can contribute to other risks like running out of money in retirement, and not earning a rate of return that keeps pace with inflation. With this broader view of risk, we can see that all investors, even GIC investors, are exposed to risk in some form or another.

Time Horizon

A time horizon generally refers to the period of time you expect to hold an investment, or until you need that money. Time horizons are often linked to investment goals and strategies, for example to retire in 15 years or buy a house next year. However, time horizons can also be associated with certain types of investment products, such as a 10-year government bond or a 2-year GIC. GICs are generally short-term investments with terms of 5 years or less and are typically more suitable for shorter-term goals and time horizons.

Current Debts

If your GIC maturity date is soon approaching, it may make sense to use the proceeds to pay down some of your debts, in particular high-interest debt. For example, many credit cards charge interest rates approaching 20% or more, which far exceeds GIC rates currently available. If you’re carrying a balance on your credit card or have other forms of high-interest debt, it may be advantageous to use the GIC proceeds to pay down those debts.

Tax Efficiency

This is a priority for many investors and building a tax-efficient investment portfolio can help you keep more of what you earn. When it comes to tax-efficient investing, it’s important to remember that different types of investments generate different types of income – interest, dividends, and capital gains. In turn, each type of investment income is subject to different tax treatment. While capital gains enjoy favorable tax treatment, interest earned from GICs is subject to full income inclusion and taxed accordingly. As such, investments such as GICs have very poor tax efficiency. When choosing your investment products, remember that all investment returns are not treated equally, and it’s not just what you earn, but what you keep that matters most.

Need for Liquidity

Liquidity refers to how easy it is to buy or sell an investment without significantly impacting its price. Liquid investments are easily accessible and can be bought and sold easily and efficiently, whereas illiquid assets or assets with low liquidity may be inaccessible, take longer to sell, and may have higher transaction costs. Many traditional investments such as mutual funds and stocks on major exchanges are considered highly liquid, while hedge funds and real estate are often much less liquid.  Other than cashable or redeemable GICs, most GICs must be held until maturity, and cannot be sold, redeemed, or transferred from one account to another until they mature.

Like other investments, GICs are not universally good or bad investments, but rather, may be more appropriate for certain investors at certain times, while being less suitable for others. If you have a GIC maturing soon and wondering what to do next, your Edward Jones advisor can help you assess your overall financial situation, and together you can determine the best path forward for you.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor, Nicolle Lalonde.