Investment funds are a good option for those who don’t have the more aggressive profile to invest in stocks, for example, but are looking for a type of investment with a return higher than fixed income products and other very low-risk investments.
Investment funds already enjoy considerable popularity among investors.
This article aims to explain what investment funds are, how to invest in them, what type of investor they are ideal for, and to try to clarify the growing popularity of these financial products.
1. What are investment funds?
An investment fund pools the investments of various individuals, known as investors, to invest these funds in diverse products . Simply put, it’s a portfolio of financial assets offered by a fund manager in the form of shares.
Thus, a fund can be composed of fixed-income securities, stocks, government bonds, among other products, which vary according to the strategy of the fund managers.
To make its composition and rules transparent, every investment fund has regulations that establish its rules. Among these rules are those relating to investment, redemption, and associated costs.
In addition to investing their resources, unit holders also pay a management fee for the work of managing the resources, which includes the acquisition or sale of assets.
2. How to invest in investment funds?
Investing in investment funds is done by purchasing shares. To acquire them, the investor needs to contact a brokerage firm, asset manager, or bank that offers this type of investment.
Generally, there are minimum investment amounts and associated fees.
Being able to make the minimum investment is one of the main factors in determining whether you will have access to a particular investment fund.
As a rule, companies request personal documents, completion of a registration form, and a declaration that the investor agrees with the fund’s regulations.
Some companies require the opening of a checking account, but it’s not a general rule.
3. Who can invest in investment funds?
Generally speaking, there isn’t a specific income bracket or social class for which this type of investment is intended. To give you an idea, it’s possible to invest minimum amounts starting at around R$ 50 and reaching over R$ 100,000.
4. What are the main types of investment funds?
Investment funds are divided according to their composition, with the main types available on the market being:
- Equity investment funds
- Short-term investment funds
- Multi-market investment funds
- Currency investment funds
- Fixed income investment funds
- CDI investment funds
- Real estate investment funds
- Referenced investment funds
It is important to note that the type of security does not necessarily indicate its risk level, although equity investment funds are generally riskier while fixed income funds tend to be safer.
5. Is there a minimum redemption period?
Although there is no minimum redemption period for money invested in most investment funds, it is important to consider that a short-term redemption can negatively impact returns .
When investing in investment funds, it’s essential to know that many have a regressive tax rate. In other words, the longer you keep your money invested, the lower the tax you pay when you redeem it.
This is the case with short-term investment funds , which have an average maturity of 365 days or less.
If the investor chooses to keep the money invested in this type of investment fund for less than 180 days, the income tax rate will be 22.5%. On the other hand, if the money is left invested for more than 180 days, the rate drops to 20%.
In the case of long-term funds , which have an average term equal to or greater than 365 days, the rates are even more attractive in relation to the time the money remains invested:
- Up to 180 days – 22.5%
- From 181 to 360 days – 20%
- From 361 to 720 days – 17.5%
- Above 720 days – 15%
It is also important to know that if the invested amount is redeemed in less than 30 days after the purchase of the shares, IOF (Tax on Financial Operations) will be applied, another reason to avoid the hasty sale of shares acquired from an investment fund.
6. What are the main costs of investment funds?
In addition to income tax on earnings, there are fees associated with investment funds that need to be taken into account when investing.
First, it’s important to know that the regulations list all the fees charged by a given investment fund, so it’s worth reading them carefully to avoid surprises.
Administration fee
This is the first basic fee. As we have already mentioned, it is charged to cover the services related to the operation and management of the investment fund by the administrator responsible for its proper functioning.
This fee is charged by applying a percentage to the total assets invested in the fund. This percentage usually varies, but is generally around 2%.
Performance rate
Unlike the management fee, which is fixed and paid regardless of the returns the investor receives, the performance fee is tied to the good work the manager does.
This fee applies, for example, when the fund’s return exceeds its benchmark, which is basically a reference rate pursued by the manager, such as the Selic rate or the CDI rate.
Exit fee
This is a fee charged if the investor decides to sell their units before a certain period established by the fund’s regulations, known as the liquidity period.
IOF
The Tax on Financial Transactions applies if the amount invested in the investment fund is held for less than 30 days from the date of investment.
7. How to compare investment funds
To compare investment funds and choose the best one for your profile, it’s important to follow some basic steps.
Assess the level of risk involved.
Higher returns are almost always associated with higher risks, so it’s important to assess from the outset whether a given investment fund is capable of guaranteeing a considerable and consistent return.
Companies that offer this type of product usually have their own criteria for classifying investment funds in relation to the associated risk. However, for a more objective view, it’s necessary to consider the next step.
Analyze the investment fund’s historical return.
Although past returns are no guarantee of future returns, an investment fund with substantial and consistent returns over a long period is more likely to outperform funds with a less consistent track record.
In the case of investment funds, it’s good to evaluate:
- The number of months in which the fund showed both positive and negative returns.
- How many times did the return exceed its benchmark (many investment funds are linked to specific indices, such as the Ibovespa or the CDI; when its return surpasses these indices, it means that its performance is above expectations);
- the fund’s volatility;
- your net worth;
- the number of shareholders;
Regarding volatility, this is an important aspect because, if you expect consistent positive returns, it’s good to look for indices with lower volatility. The last two items are important to get an idea of the fund’s size and, consequently, its solidity.
While size isn’t exactly a guarantee of good returns, it’s certainly an indication of good management and a tendency towards greater reliability as an investment.
Furthermore, it is important to assess the historical performance of these two factors and how they have been varying in recent months, as they are also a good indicator of the fund’s future prospects.
Significant drops in the fund’s total net worth and the number of investors are important signs that something is wrong with that investment.