Typically, an index-linked GIC might be made up of zero coupon bonds to protect the principal and a call option on a stock index. A call option is the right to buy a security at a fixed price within a certain time. Index-linked GICs are offered by banks, credit unions, trust companies, investment dealers, mutual fund companies and insurance companies. Their structure will vary from one financial institution to another, so be sure to read the fine print. What's more, the return used to calculate your gains usually doesn't include the dividends paid by the companies in the index.
Returns are often capped.
Instead, you'll be limited to anywhere from 60 to 90 per cent of the index's price rise. Other financial institutions simply put an absolute ceiling on how much you can make. The financial institution will keep any profits above the cutoff for itself. Some financial institutions may offer a minimum guaranteed rate of interest, but you may have to accept a smaller share of the gain in exchange. Depending on your circumstances, and the direction of financial markets, this trade off may be worth it.