Forex Funds


1. What is it?

Forex funds invest in bonds relating to the price variation of a specific foreign currency or on currency spread contracts (currency spread contracts are bonds that pay a compensation if the difference between the rise in a currency price is bigger than the country’s basic rate rise: in Brazil, they take into account the Dollar variations against the Selic’s variations. Should the Dollar hike, compensation will be paid to the holders of these bonds, proportional to the difference between the Selic rate and the hike). To be considered forex funds, they must have a minimum of 80% of their portfolio directed to this type of bond. Funds relating to the Dollar are the most commonly found.

The remaining 20% of the portfolio can be used for fixed income investments, and derivatives can only be used, in this type of fund, for hedging: no leveraging is permitted. One should also note that having the Dollar, for instance, as benchmark doesn’t necessarily mean the fund will directly follow the currency.

The main objective of this type of fund is maintaining the power of purchase in foreign currency, of follow its variation. Therefore, this type of fund should be chosen by investors looking to protect themselves against the Real’s fluctuation, rather than by people aiming to speculate on Dollar hikes. These funds are also great for investors holding debt in foreign currencies, or any other such long term obligations. Practical examples are import/export companies or people sending money abroad or planning to live or travel abroad. This type of fund is also subject to fluctuations on interest rates via currency spread contracts.

Forex funds don’t invest in foreign currency directly, but in foreign currency bonds. This is done via derivative operations. The investment object is the currency’s variation, not the currency itself – so results from these funds do not follow exchange rates necessarily. One should also note that administrative fees and income tax will most likely impact profitability as well. Since income tax rates decrease proportionally to the longevity of the investment, one should also opt for longer term commitments.

The main risk factor for forex funds is the variation itself – both the currency’s and that of the currency spread contract. As a practical example, a R$ 1.00 (One Real) investment when the Dollar rates R$ 2.00 represent US$ 0.50 in Dollar quotas. Should the Dollar fall to R$ 1.00, the quota remains the same: but the redemption value will be only R$ 0.50.

2. Taxation

Taxation in forex funds is similar to fixed income taxation: meaning it’s inversely proportional to the time of investment, as per the table below:

  • Investments for up to 180 days: 22.5% (only over profits)
  • Investments between 181 and 360 days: 20% (only over profits)
  • Investments between 361 and 720 days: 17.5% (only over profits)
  • Investments over 720 days: 15% (only over profits)

Tax over financial operations, or IOF, also burdens all redemptions made up to 30 days from the date of investment. Investments lasting over 30 days are not burdened by the IOF. Rates applicable follow the table below:

Number of days from the investment date

Pro-rata tax incidence over profits (%)

1 96
2 93
3 90
4 86
5 83
6 80
7 76
8 73
9 70
10 66
11 63
12 60
13 56
14 53
15 50
16 46
17 43
18 40
19 36
20 33
21 30
22 26
23 23
24 20
25 16
26 13
27 10
28 6
29 3
30 0

The income tax due will be charged according to a daily verification of profits – and the payment will always be withheld by the fund, so the investor needn’t worry about particularities. Payment will be provisioned by the administrator inside the quota holder account – this means the fund will make a daily verification of profits and reserve the corresponding amount in income tax on the side. This reserve will be deduced from total quota values, directly reducing the total number of quotas held should the holder wish to redeem total or part of it. A reduction will also be made on the two tax payment dates set by the government: the last day of both November and May, each year. This process of “eating” part of the quotas held by an investor to satisfy income tax payments is what’s known as Quota-eating.

For long term investments, quota-eating rates are 15%. For short term, rates are 20%.

3. Advantages

  • Protection – One of the greater advantages of forex funds is protection against currency fluctuations.
  • This may be a good choice for investors planning trips abroad.
  • Great for companies holding debt abroad: hedging the destination currency.

4. Disadvantages

  • Investment funds are not guaranteed by the Credit Guarantee Fund
  • High administrative fees may affect profitability.
  • High risk investment considering currency fluctuation – not appointed as a multiplication option.

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