1. What is it?
As the name says, fixed income funds focus their assets in fixed income assets. As a rule, a minimum of 80% of their portfolio must be invested as such. The main risk factors impacting the portfolio will necessarily be the interest rates and price indexes. For clarity sake, follow some examples of what fixed income assets are: Bank Deposit Certificates (or CDBs, in Portuguese), public bonds, debentures, financial securities, buyback transactions (widely used to increase liquidity), and so on.
These funds may also be classified as “long term” funds, when the average term of the portfolio surpasses 365 days. Performance fee charges are not allowed, except if for qualified investors.
Fixed income funds are considered low risk if compared to other types of fund. This doesn’t mean, however, the fund cannot incur in a loss. If interest rates are high, some bonds will see prices fall, which will negatively impact the portfolio at least in the short term. Another relevant factor to account for is the administrative fee. Higher fees will necessarily impact the bottom line, making profitability show shyer results than the ones presented by the common savings account. The investor choosing this type of fund will need to inspect bylaws to ensure high profitability and low administrative fees – preferably not exceeding 1% per year.
This type of fund is ideal for people that want safety, that aim for having their investments match the prime rate. Usually more conservative investors, or people that lack the time to keep up with the market and invest on their own. Fixed income funds are also a good diversification option, because their purchase power will reach assets not usually at the disposal of the common investor.
Fixed income funds follow the same basic rules set for all investment funds.
Taxation in fixed income 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 (%)
There is also the quotas-eating, which is a kind of compulsory payment of income tax. Your deduction always happens on the last day of May and November, ie, two times per year. This collection of tax in advance is so named because it decreases the total amount of quotas, ie, the amount that you own is always decreased when the quotas-eating occurs.
Funds for long term investments, the rate of come-quota is 15%. For short-term funds, the rate is 20%.
Income tax is calculated daily and accrued on your account. Every six months (May and November), the lower rates of regressive IR table of each type of fund are applied over the income of the quotaholder. So if your application reaches the minimum tax rate, this provision ceases to exist. Remember that there is no double taxation in quotas-eating. For example, if your application stay invested long enough to reach the lower rate of income tax, the tax will not be applied, if the quota-eating has already occurred. Otherwise, if you redeem before reaching the lower rate of tax, at the time of redemption, you will pay only the difference.
- Doesn’t require large amounts of money for initial investment;
- Professional management may select the most profitable assets;
- Reduced risk, if compared to other types of funds;
- Liquidity – making it possible, in some cases, to redeem and receive payment on the same day;
- Diversification – providing access to a myriad of investments, some impossible for the smaller investor.
- Investment funds are not guaranteed by the Credit Guarantee Fund;
- Administrative fees may impact profitability;
- Smaller investment terms mean larger income tax charges;
- Certain fixed income funds may not be so attractive in terms of profitability. In a low interest scenario, many funds may be less profitable than the traditional savings account.