Guaranteed Investment Fund (GIF)

Definition

A Guaranteed Investment Fund (GIF) is a type of investment product that offers investors the benefits of a mutual fund, along with a guarantee of the principal investment. This guarantee is typically placed upon maturity or death, providing a protection against market fluctuations. It combines the growth potential of a long-term investment with the security of principal protection.

Phonetic

The phonetics for the terms are as follows:Guaranteed: gahr-uhn-teedInvestment: in-vest-muhntFund: fuhndGIF: jiff or giff (there is an ongoing debate on the pronunciation. Traditional pronunciation is with a hard ‘g’ , like ‘gift’. Others pronounce it with a soft ‘g’ , like ‘giraffe’)

Key Takeaways

1. Security and Growth Potential: Guaranteed Investment Fund offers a unique blend of investment security and growth potential. It guarantees the majority of investors’ initial sum regardless of how the market performs, while still giving them an opportunity to grow their investment by participating in the market.
2. Maturity and Death Benefit Guarantees: An important feature of GIFs is the maturity and death benefit guarantees. Even if the market falls, a GIF ensures that your beneficiaries receive the guaranteed minimum or market value (whichever is higher) upon your death, which offers peace of mind and financial security.
3. Creditor Protection: A distinctive feature of a Guaranteed Investment Fund is creditor protection in the event of bankruptcy or lawsuits. This makes them an excellent tool for business owners and professionals seeking to secure their personal assets against business risks.

Importance

A Guaranteed Investment Fund (GIF) is significant in the field of business and finance because it offers investors a secure and often, lucrative investment option. It is especially important due to the principal protection it offers to its investors, ensuring that they receive at least a portion, if not all, of their original investment back, irrespective of how the investment performs, which highly minimizes the risk involved. The potential for returns in addition to the initial investment further makes the GIF an attractive option. Specific GIFs offer diverse investment strategies from fixed income to equities allowing customization according to investor needs. Therefore, GIFs can be an essential part of an investment portfolio, providing both security and growth.

Explanation

A Guaranteed Investment Fund (GIF), often recognized as a secure way to endow wealth for long-term purposes, serves as an investment vehicle that merges the growth potential of a mutual fund with the security of a life insurance policy. The core objective of a GIF is to provide investors with the assurance that, irrespective of how the underlying assets perform, they will receive a predetermined minimum yield, usually the principal amount, upon maturity or death. It is widely employed as a conservative investment approach to safeguard against market volatility, aiming to strike a balance between investing in potentially high-return assets and maintaining an element of capital protection. Apart from the guarantee component, its main utilities involve estate planning and income generation. Since a GIF is an insurance product, upon the death of the investor, the investment proceeds will directly be transferred to the designated beneficiaries. This bypasses probate, the legal process to validate a will, creating a smoother transition of wealth. Moreover, GIFs potentially offer regular withdrawal options, which have a tax advantage since the income is a blend of return of capital and growth, making it a popular choice amongst retirees wanting a consistent income stream. Therefore, despite lower potential returns compared to other higher risk investments, given its built-in guarantees and various usage, GIF continues to be an integral part of a diversified portfolio strategy for many risk-averse investors.

Examples

1. Annuity-Based GIFs: An example can be found in insurance companies selling annuities. An insurance company like Manulife Financial might offer a Guaranteed Investment Fund, which guarantees the principal (original sum of money invested) over a specified period, providing a steady income stream after retirement. 2. Mutual Fund GIFs: Some mutual fund companies offer Guaranteed Investment Funds to their investors. For example, Dynamic Funds, a Canadian investment firm, provides GIFs that give investors the potential for market growth while also promising the security of a guaranteed return. 3. Bank-offered GIFs: Banks, such as Canada’s RBC Royal Bank, offer their customers GIFs as an investment option. These products guarantee the investor’s principal while also potentially offering an attractive return. This is especially beneficial for risk-averse investors who want the possibility of higher returns, but don’t want to risk losing their original investment.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Principal Protection: This term refers to an assurance that, regardless of how the investment performs, the investor is guaranteed to get back some or all of the initial amount invested.
• Maturity Guarantee: This is a provision in GIFs that ensures the investor will receive a predetermined amount of return at the end of the investment term, regardless of market conditions.
• Segregated Funds: These are individual insurance contracts that investors purchase through life insurance companies, which are often the base of GIFs.
• Reset Option: An option in GIFs which allows the investor to lock in gains if the market value of the investment increases, thereby increasing the maturity guarantee amount.
• Asset Allocation: A strategy often used in GIFs where the investor’s funds are spread across different types of investments to reduce risk and increase potential return.

Sources for More Information

• Investopedia
• BlackRock
• SunLife Financial
• Mackenzie Investments