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Everything you need to know about investing in index-linked GICs




When you start researching how to invest your savings, one of the first things to come up is usually a GIC (Guaranteed Investment Certificate). This is because GICs are one of the safest ways to invest. You give a financial institution your money (also known as your principal investment) and at the end of the term you set you’re guaranteed to get that money back, plus any interest you’ve earned. Term lengths range from one month to five years and longer terms generally have higher interest rates. Let’s review one of your GIC options. 

What's an Index-Linked GIC?
Index-linked GICs are a type of GIC where returns are linked to the performance of stock market indexes. Like fixed rate GICs, index-linked GICs have a set term, usually between one and five years, and you’re guaranteed to get your principal investment back. The performance in the stock market or sector to which the GIC is “linked” determines the rate of return.
 
Note: This is also known as a market-linked GIC.

Why should I invest in an Index-Linked GIC?
Investing in an index-linked GIC gives you the potential to earn a higher return than you would with other fixed income products. Plus, you can feel secure knowing that no matter how the market performs, your principal is guaranteed.
 
Some types of index-linked GICs also have the added benefit of a minimum guaranteed return in addition to the principal. That way, you’re guaranteed to earn something on your investment even if the market or sector you invested in doesn’t perform well.
 
It’s worth noting that there’s a little more risk involved in an index-linked GIC because while you could earn a great return if the market performs well; you also take the chance that if the market doesn’t perform well you’ll only get the minimum guaranteed return.

Understanding key terms
It’s always important to read the fine print, and when it comes to your index-linked GIC purchase agreement, you want to make sure you understand a few key things.

Minimum return
Sometimes stock markets and sectors don’t see gains over a GIC’s term – they may even experience a loss. A minimum return is just what it sounds like: a guarantee that you will earn a minimum return, even if the index doesn’t have an average positive return over the GIC term. A couple things to note:

  • The minimum return for index-linked GICs is often lower than a fixed-rate GIC with a comparable term.

  • Not all index-linked GICs offer a minimum return. 


Maximum return
Some index-linked GICs have a maximum return. This means that even if the index performs really well, your return is limited to the maximum set by your GIC agreement. For example, if the index returns 15% and your 3-year index-linked GIC has a maximum 12% return, you get the 12% and not the index’s actual return of 15%.

Participation rate
The participation rate refers to how much your GIC “participates” in the actual gain of the index it’s linked to. It can limit the GIC’s earning potential – for example, a GIC with a 60% participation rate only earns 60% of the index’s gains. So if the index rises 20% during the term of your GIC, your earnings are limited to 12%.

All of Meridian’s index-linked GICs offer a participation rate of 100%.
 

Interested in an Index-Linked GIC from Meridian?
Just as there are many different stock markets indexes and sectors, Meridian offers several different index-linked GICs.

Learn more about all of Meridian’s index-linked GICs

 
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