Exchange funds: what are they? How do they work?

Have you heard about exchange funds? They are an investment option that is gaining more and more popularity, even more so among investors who want to diversify their portfolio and protect their assets from the volatility of the financial market.

In a practical and quick way, exchange funds are investment funds that invest resources in foreign currencies, such as the US dollar, euro, Japanese yen, sterling pound and so on. The purpose of these funds is to seek profitability through the exchange variation of these currencies in relation to the local currency.

What we will see in this article:

How do exchange funds work?

Exchange funds invest in financial assets denominated in foreign currencies, debt securities issued by governments and foreign companies, shares of foreign companies, for example. These assets are chosen by the fund manager, who aims to maximize the fund’s profitability over time.

The return on exchange funds depends on the exchange rate variation between the local currency and the foreign currencies in which the fund invests. Therefore, if the local currency appreciates against foreign currencies, the fund’s return will be negative. On the other hand, if the local currency depreciates against foreign currencies, the fund’s return will be positive.

Exchange funds can be classified into two categories:

Passive exchange funds – aim to replicate the profitability of a given exchange index, such as the commercial dollar.
Active exchange funds – have a more active management, being able to invest in several currencies and choose the best market opportunities.

Despite presenting risks and requiring technical knowledge to operate, exchange funds can be a good option for investors seeking to diversify their portfolios and also protect their assets from the volatility of the financial market.

But attention, it is important that the investor make a careful analysis of the funds available in the market, evaluating their investment policy, profitability, risk and management fees. See more details in a meeting with one of Renova Invest’s advisors.

What are the costs?

Most of the time, exchange funds tend to charge an administration fee. This fee is charged to cover the costs of managing the fund and may vary from one fund to another. It is important to choose funds with lower management fees, as this can have a significant impact on long-term investment profitability.

Another fee that may be charged is the performance fee, which usually affects the fund’s return if it exceeds the benchmark.

In relation to taxes, there is incidence of the Income tax (GO). It can be charged in advance in the form of quota eaters, which is common in various types of investment funds. When charged, the shareholder pays, in advance, a percentage of 15% or 20% of IR on earnings – depending on the fund (short or long term).

For the payment of income tax upon redemption, the tax incidence varies from 22.5% to 15%. The quota eater is deducted from the amount due. Another tax that can be charged is the Tax on Financial Operations (IOF), if the redemption is carried out within 30 days after application.

The IOF rate varies according to the redemption period, being higher in the first days after application.

Who is it suitable for?

Exchange funds tend to be more suitable for investors with a high profile. moderate or thrown off. As it presents risks due to exchange rate fluctuations, it is also important to consider whether the objective is to profit from this variation or to protect and diversify the portfolio.

In general, those who want to protect their assets against fluctuations in the dollar against the real or if they have financial commitments in foreign currency can benefit from exchange funds.

In addition, investment funds in dollars are usually interesting options for those who want to speculate in the market. Before making your contributions, it is worth considering, therefore, your objectives in relation to the exchange fund and your profile as an investor.

So how to invest in a forex fund?

Before investing in exchange funds, it is important to assess the investor’s risk profile and financial objectives. As FX funds are exposed to currency fluctuations, they can be highly volatile and are therefore not recommended for conservative investors or for emergency reserve.

To invest in this type of fund, you must have an investment bank account. Through the platform of the financial institution, you can access the available funds and make your choice.

At this point, it is important to emphasize the importance of relying on an institution that is able to offer specialized and quality support to investors. This can make all the difference when investing.

Make sure, therefore, that you choose an efficient and reliable investment bank, which has authority when it comes to investments. The BTG Pactual investment bank is the best option for anyone who wants to invest in an investment fund in dollars with efficiency, simplicity and security to achieve their financial goals.