Portugal investment funds are financial instruments that bring together, as a rule, capital from several investors, constituting autonomous assets managed by professionals (management companies). Legally known as collective investment undertakings, financial instruments differ from other instruments in the diversity of assets that can make up their portfolios. The most common are securities funds, which invest mainly in shares and bonds, other funds, among other assets. Real estate funds [investing primarily in real estate] and venture capital funds [investing in equities] should also be considered.
Information on the conditions for subscription and redemption can be found in the Prospectus and in the Key Investor Document (KID) of each fund.
The Key Information Document (KID)
The Key Information Document (KID) must be provided to the investor prior to subscription, and includes information concerning: the fund, the investment objectives and policies, the risks (including the synthetic risk indicator (SRI)), the costs and the subscription and redemption conditions.
You should also take into account the prospectus, which includes more detailed information on the fund, and the reports and accounts produced periodically.
Risk Profile
Risk profiles encompass various characteristics such as age, greater or lesser aversion to the risk of losing invested capital, availability for short or medium and long-term investment, and the level and fluctuation of expected returns resulting from previous choices.
There is no harmonised classification of investor profiles among financial institutions acting as financial intermediaries. The most common terms, for the various types of investor, are:
- Conservative or cautious
An investor who looks for products with a guarantee of capital and returns equivalent to short-term interest rates. This investor is opposed to the main risks, namely capital, yield and liquidity risks and does not tolerate large fluctuations in the value of products. The investor prefers investments with guaranteed capital, to which a lower return may be associated. - Balanced or moderate
This investor prefers products with a guarantee of the capital invested. However, the investor is willing to take some risk and volatility and seeks, in the long term, a return above that of short-term interest rates. - Bold or dynamic
An investor who seeks a return greater than the market average. It is available both for medium and long-term investments, as well as to bear fluctuations in product prices and take the risk of losing the capital invested.
Main risks
Each investment fund has its own characteristics and risks that can only be assessed by reading the compulsory documentation associated with each fund.
Capital
Investment funds with capital guarantees are uncommon. The higher the risk class to which the fund belongs, the greater the potential for the asset portfolio to appreciate. On the other hand, losses are more likely, especially with short investment periods.
Venture Capital – the risk that the amount receivable by the investor will be less than the capital invested;
Market risk
In securities investment funds, shares, bonds, raw materials, exchange rates and other assets that make up the portfolio are generally listed on capital markets and therefore experience price fluctuations. As a result, there is the possibility of a devaluation of the assets that make up the fund’s portfolio and, consequently, investors lose part, or all the capital invested.
In real estate investment funds, the income obtained is subject to real estate market conditions, i.e., it relies on the variation in real estate prices and on the rental market.
Remuneration risk
The returns generated by the funds are not known at the time of acquisition but depend on the evolution of the assets that compose them. The returns generated by the funds can be regularly distributed to the participants, in which case they are called distribution funds. When income is not distributed, the funds are called capitalisation or accumulation funds.
Liquidity risk
Investment funds, especially open-ended funds, are generally highly liquid. The redemption rules should be set out in the mandatory documents of incorporation of the respective funds.
In the case of closed-end investment funds, the investor must, as a rule, hold the units until the liquidation of the fund. It is, however, possible that they are sold before that time, provided that the financial intermediary finds another buyer for them.
Important Tips
Make sure the financial intermediary is authorised
Before investing, you should confirm whether the entity with whom you plan to make your investment with is authorised to provide financial intermediation services. Financial intermediaries must be authorised by the CMVM to carry out this activity, namely, to advise or execute investors’ decisions. You can consult the list of registered financial intermediaries on this portal.
Ensure you have all the information
Always read the documents that describe the financial instrument before subscribing or purchasing. Do not sign any document if you have doubts or do not understand the characteristics of the product or service you wish to contract. Question the financial intermediary and get answers regarding the product or service and bear in mind that any financial instrument carries risk. Make sure that your decision has been made based on information contained in written, dated and signed documents.
Diversify
“Never put all your eggs in one basket” is a popular and very familiar idiom. When applied to investments, this phrase means: diversify the financial instruments wherein you invest your savings, to reduce risk. It is advisable to invest in different financial products, with different degrees of return and risk, diversifying, if possible, by geographical areas and economic activity sectors.
Beware of guaranteed returns
Promises of high investment returns with little or no risk are classic signs of fraud. Every investment has some associated risk associated and the prospect of higher returns means you are also taking on more risk.
Understand the investment
If you do not understand the suggested investment, question your financial intermediary. If after clarification you still do not understand, do not invest.
Understanding Fees
The following fees applicable with investment funds.
- Transaction fee – Payment of the reception, transmission or execution or a purchase or sale order given by the investor.
- Registration and deposit fee – Payment for the registration and deposit service of financial instruments in each investor’s account (also called the custody fee or safekeeping fee).
- Fee on transfer of financial instruments between accounts – Payment for the transfer of financial instruments registered in an investor’s account to another account.
- Dividends/Interest payment fee – Payment for the deposit into the investor’s account of the amount of dividends/interest corresponding to the shares/bonds owned.
- Corporate events commission – Payment of the investor’s exercise of rights of the securities held, such as participation in capital increaseS, company spin-offs or mergers.
- Subscription and redemption fee – Cost paid by the investor at the beginning and end of the investment. For some funds, redemption fees depend on how long the participant has held the units (IUs).
The investor must be informed of the following:
- characteristics of financial instruments (type of financial instrument, start date, date and method of reimbursement, interest/dividend payment date, method of calculating return on investment);
- risks (market, capital, credit, counterparty, interest rate, exchange rate, liquidity and legal/tax);
- commission fees pertaining to the securities account, subscription, reimbursement, redemption and/or payment of interest/dividends);
how to divest (early repayment, sale, exchange);
any conflicts of interest (e.g. of the intermediary, issuer, trader).
How to Invest
Investing in financial instruments can be carried out in several ways. The right choice should consider your situation and knowledge. You may choose between:
Investing directly
You can invest directly – on via your own initiative -, transmitting orders through a financial intermediary authorised by the CMVM to exercise the activity, using one of the various channels – digital, telephone or other – provided by that entity. This option implies a greater knowledge of both the financial instruments and trading markets as well as the level of tolerance to loss.
Start off investing wisely and then only move on from there to more complex and/or riskier instruments when you already have the necessary knowledge to understand those instruments or investment strategies. Overconfidence can be one of the greatest threats for investors, particularly for beginners with little experience.
Do not neglect basic investment principles. Remember that the financial intermediary must determine your investment knowledge and experience or your risk appetite. It is therefore important that you answer clearly and truthfully the questions asked by the financial intermediary to define your investor profile
Use an investment advisor [investment advice]
You can choose an investment advisory service that is supported and guided towards the management of financial investments. The function is performed by specialised advisors who help you to choose the most suitable assets, considering your investment objectives and timeframe, your financial situation, and your degree of tolerance for capital loss risk [i.e., your investor profile].
Advice is therefore a service that supports decision-making. It is useful for various types of investors, from those who do not have enough time or knowledge to those who need guidance and assistance in choosing suitable financial assets.
It should be noted that the advisory service is advice-giving only and it is always up to the investor to have the final say to buy, hold or sell a specific financial instrument. The financial intermediary may charge an additional fee for providing this service.
Entrust the management of your investments to a specialised entity [portfolio management].
Portfolio management is a service provided by teams of professionals working in financial intermediaries or management companies authorised by the CMVM to carry out this activity.
One of the main advantages of this service is customisation. By contracting the service, the investor determines the investment policy he/she wants for his/her portfolio, that is, the percentage he/she wants for each class of assets – i.e., shares, bonds, or investment funds – and the consequent degree of risk he/she is willing to take. Thus, the function of the manager is to manage the portfolio, with a view to obtaining the best possible return and respecting the investor’s wishes.
Portfolio management
Portfolio management is a way of delegating the role of building up and managing a portfolio to a professional and making the necessary operations according to the investor’s investment objectives and profile.
In this way, the portfolio manager is responsible for analysing and choosing the assets in the portfolio, as well as deciding the best moment to make purchases and sales in the investment portfolio. The manager may also make decisions and act without the client’s intervention. However, the manager must respect the client’s profile and the objectives established when the service was engaged.
