As a fixed-income investor, you may be faced with the dilemma of seeking growth in a low interest rate environment without losing the principal protection that fixed-income investments can provide. With interest rates as low as they have been, it can be hard to squeeze out a major interest payment from a GIC investment. But there are options for protecting and diversifying your investments without requiring you to take on additional risk.
"Diversification" is a term often used in equity investment discussions. In plain terms, diversification means spreading your investments across a range of sectors, geographic areas and asset classes to protect your portfolio from a downturn in one particular sector, asset class or region. But diversification can also be part of the discussion on GIC investing too.
The Canadian Deposit Insurance Corporation (CDIC), has certain rules to protect GIC investments in the event a CDIC Member institution fails. Namely, the CDIC insures eligible Canadian-currency GICs, under original investment terms of five years and under, at each CDIC member institution, up to a maximum of $100,000 (principal and interest combined). If you open an account at any Canadian bank and invest in the GICs of that specific bank, then only $100,000 (including interest) of the investment is protected in the event of the bank's default. If you took out a $500,000 GIC at the same bank, you would still only be protected for $100,000. So what if you want to protect an investment of $500,000?
NOT ALL INVESTMENTS CREATED EQUALLY
First, note that CDIC coverage is "per issuer." If you have $500,000 in ABC Bank GICs, you are protected up to $100,000. However you are protected for up to $100,000 for each GIC offered by Bank ABC, Bank DEF, Bank GHI and so on.
Second, not all investment firms are created equally. Some can only offer their own products, while others can offer GICs and other fixed-income instruments from a variety of issuers. RBC Dominion Securities, for example, has access to GICs from over 32 different institutions. This means if you wanted to invest $500,000 into a 1-year GIC, you could split the total investment across five or six other institutions' 1-year GIC offerings and still be protected for the total value, since each investment is provided from a different issuer. Better yet, firms with broader access can also "shop around" multiple issuers for the most competitive rates of return on your investment.
When interest rates are low and the markets are volatile, many investors appreciate this strategy not only for the higher rates that can access, but because it allows them to protect their initial investment.
Check here for more information on CDIC protection of GIC investments.
This article was supplied by Colin MacAskill CFP, CIM, a Vice-President and an Investment Advisor with RBC Dominion Securities Inc. Member-Canadian Investor Protection Fund. Colin welcomes your calls on his direct line (604) 257-7455.
