What Are Market Linked Guaranteed Investment Certificates (GICs)?
Market Linked Guaranteed Investment Certificates (GICs) are term investments that are linked to the performance of stock market indexes. As the markets rise, the rate of return earned on the GICs increases. The GICs provide the safety and security of a traditional GIC but offer the potential for higher returns when markets are performing well. These investments offer an attractive combination of an assured return of principal plus the possibility of gains that are linked to market performance.
Advantages Of Market Linked GICs
There are several advantages to using market linked GICs when investing for the long term. First and foremost, GICs provide the security of a guaranteed return of principal. In addition, market linked GICs allow investors to potentially earn more if markets rise over the course of their term. This gives investors the opportunity to reap the rewards of market movement without risking their principal investment.
Furthermore, investors in a market-linked GIC can choose between a fixed or floating rate of return depending on their risk tolerance and market outlook. By opting for a fixed rate of return, investors can lock in the full rate of return earned upon maturity. On the other hand, investors who choose a variable rate of return can benefit from higher returns in case of market outperformance. This gives investors the flexibility to tailor their investments according to their risk appetite and desired return.
Disadvantages Of Market Linked GICs
Despite the potential advantages offered by market linked GICs, there are also some potential drawbacks. First of all, market linked GICs may introduce higher levels of risk than those associated with traditional GICs. Since the returns are linked to market performance, the potential for added returns is inversely proportional to market performance. In other words, investors will not be able to benefit from market gains when the relevant index or portfolio is underperforming.
In addition, market-linked GICs may also carry higher minimum investment requirements than traditional GICs. This means that investors may need to commit a larger sum of money if they hope to take advantage of the potential for higher returns. It is also important to keep in mind that, since the returns are linked to the performance of stock market indexes, investors should be aware of the additional risks associated with the stock market.
Finally, market linked GICs may also carry higher management and other fees. This means that investors should carefully consider the costs associated with such investments before committing a large sum of money to market-linked GICs.
Overall, market-linked GICs can provide an attractive combination of the safety and security offered by traditional GICs along with the potential for added returns that are linked to market performance. However, investors should carefully consider the pros and cons of such investments before committing any funds. By doing so, investors can ensure that they are making the most informed decision on their investments.
What are Market-Linked GICs?
Market-linked GICs, or MLGs, are financial products that combine elements of traditional guaranteed investment certificates (GICs) with higher returns closely tied to the stock market. The principal of the MLG is guaranteed by the issuing financial institution, while the return rate changes according to the performance of the stock market, usually a key index such as the S&P 500 in the United States. This gives investors potential upside of higher returns than a regular GIC, while ensuring the safety of the original principal.
MLGs are typically held for a fixed period of time, with the investor receiving the return rate whichever is higher, either the predetermined rate upon purchase or the rate resulting from the stock market performance. As long as the underlying benchmark index or other predetermined security rises, the MLG will pay out a higher return rate than a traditional GIC.
Pros of Investing in MLGs
Investors looking for higher returns than traditional GICs with the security of principal protection can benefit from investing in MLGs. Because these products are tied to the performance of a benchmark index, investors can often take advantage of the current environment in the stock markets. MLGs provide an opportunity to outpace inflation and to compound wealth over time with the same safety offered by a backed-by-the-institution GIC.
Since the MLG’s interest rate changes according to the performance of the benchmark index, if the underlying asset increases in value, the investor stands to receive higher returns than they would from a traditional GIC with a set return rate. Also, unlike traditional GICs there is no early withdrawal fee so investors can make adjustments to their MLG portfolio with more flexibility if the underlying asset performs poorly.
Cons of Investing in MLGs
The greatest disadvantage of MLGs is the lost opportunity cost; while MLGs can potentially offer higher return rates than traditional GICs, there is still a risk that the rate could be lower. Also, as with all forms of investing, there is a chance that the investor could lose the principal or a chunk of the gains due to market downturn. Because MLGs are not insured by the FDIC or other financial institutions, investors should consult their financial advisors before investing.
Another downside to MLGs is the fees they can incur. Some MLGs require annual management/stewardship fees that can significantly reduce the investor’s return. Therefore, it is essential for investors to read the fine print so they understand what fees they can expect. Also, unlike traditional GICs MLGs may have minimum investments, which can limit the ability of more casual investors to participate.
In conclusion, investing in MLGs can be a great way to increase one’s returns while still safeguarding their principal. However, these products carry additional risks and higher fees than traditional GICs, so it is essential for investors to carefully consider their options before deciding which financial product is best for them. With research and careful planning, MLGs can be an effective way to diversify an investment portfolio and build wealth.
