Are GICs a reasonable investment within a TFSA?

Question

I have a TFSA with ~$15k in it. ~$5k is invested into a 0.9% GIC, for 12-months, but I've been told by nearly everyone I've mentioned that rate to that I was burned, and that my money could have been invested in a far better way.

I was doing online account related maintenance this morning, and noticed my bank (Scotiabank) is offering a 18-month 1.4% GIC (hopefully that link is public), and advertising it like it's a great investment.

Is this worth investing in? I have very little experience in investing; the only thing I have to go on is they're saying their typical rate is 1.2% for 12-months. That makes it sound like a good thing, but I'd like a second opinion before I invest.

I have no use for the money in the short-term, so the fact that it's for 18-months isn't an issue.

Should I purchase it and throw all available $10k in?

I live in Canada if that's relevant to anything.

Answer 1

This is largely dependent on your overall investment goals.

GIC's provide protection of the invested capital and a guaranteed return at the end of the term. However, in real terms, 1.4% over 18 months results in a loss of capital in real terms. This is because inflation in Canada is just about at or higher than 1.4% per year.

In other words, at best, you are equalling inflation and gaining nothing in those 18 months.

If their typical rate is 1.2% over 12 months, you are only gaining an additional 0.2% for the additional 6 months. You know as well as I do, 0.2% for 6 months is abysmal.

If you have no use for the money in the medium to long term, you should look in to an index fund that is balanced, and diversified and more likely to get you a higher real return over the time period of a few years. Look in to:

• e-Series mutual funds through TD Canada Trust (if you are okay with managing your own portfolio online)
• Tangerine's mutual funds (if you want to pay a little more to have it managed for you)

If you want to preserve the capital over the short term because you might need it after the 18 months period, the GIC is the safer and recommended option.

Answer 2

In addition to the advice of @karancan, If you wish to stay strictly with GICs, there are better ways to find good GIC rates, than looking at advertising from institutions you are already dealing with.

This site, http://www.globeinvestor.com/servlet/Page/document/v5/data/rates?order=d&pageType=gic_long&sort=IR1&page=1&tax_indicator=N (among others) display impartial GIC rates for many institutions and terms of investment, in sortable form.

Many of these institutions allow on-line purchases and transfers, requiring only a "regular" bank account as a source/destination for on-line transfers...