Investment Funds in Investment Funds

Investment Funds in Investment Funds


1. What is it?

Funds for investment in investment funds (or simply quota funds) focus, as the name suggests, in choosing a variety of investment funds in which to insert their resources. They buy investment fund quotas, always aiming for the funds with
higher profitability. The name of the quota fund must always specify to which class of investment fund it’ll dedicate its attention: short term, long term, referenced, forex, equity and so on. Funds that specify a class in their name will need to purchase quotas in funds belonging, exclusively, to that class. Funds that wish to invest in a multitude of classes will be named multimarket funds.

Quota funds have to focus at least 95% of their portfolio in investment funds. The remaining 5%may be directed to public bonds, bonds issued by financial institutions and buyback transactions. Exclusive funds quotas are not allowed.

If the fund is classified as a fixed income fund, the maximum available for investment in real estate funds or receivables funds is a mandatory 20%. The fund may apply 100% (one hundred percent) of its net assets in quotas of the same fund, provided that respected the investment policy set forth in the regulation.

The great advantage of investing in quota funds is diversification. One may invest in several funds at the same time, instead of focusing exclusively on one. Risks are, thus, further deluded and profits, one hopes, boosted. Multimarket funds offer an even wider diversification option, maximizing chances of profits.

2. Taxation

Taxation in quota funds will depend on the type of fund chosen. Since the name of the fund must specify the classification of the other funds it’ll follow, taxation will incur according to that same denomination. As a practical example:

Fixed income and long term funds (with a portfolio averaging 365 days) will be burdened by income tax by a rate inversely proportional to the duration of the investment, as detailed:

  • 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)

For index funds and equity funds, income tax rates 15%, payable at the time of redemption.

For short term funds (with a portfolio averaging up to 365 days), rates will vary as follows:

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

This means taxation will always follow the type of investment strategy the fund chooses, for both income tax, tax over financial transactions (IOF, in Portuguese) and quota-eating processes.

3. Advantages

  • Low level of initial investments;
  • Diversification – allows for the investment in a series of funds, without having to choose one specifically;
  • Risk management – if one fund shows a decrease in performance, exposure is decreased, since other funds may compensate for the fall.

4. Disadvantages

  • Not guaranteed by the Credit Guarantee Fund;
  • High administrative fees may impact profitability;
  • You should always analyze which fund to invest, as some funds can be considered high risk (especially those that invest in stocks and equity securities) or low risk (fixed income funds).

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