Savory & Partners: Choosing The Right Fund For Portugal's Golden Visa
A great change within Portugal's golden visa is the sudden interest in the mutual fund investment category.
No golden visa applicant opted for the fund investment option between the years 2012 and 2018, but after a few investors chose the option in 2019, the mutual investment fund option exploded onto the golden visa scene.
In 2019, 0.56% of all golden visa applications came under the fund option. That percentage grew to about 4% in 2020, 9.35% in 2021, and finally soared to 17.41% in 2022.
The interest in funds as a route to the golden visa is understandable; they come with tax exemptions, a simple exit strategy, and decent returns on investment. They are also less emotionally dependent than real estate, which relies heavily on personal preference. They do not require investors to conduct visits to Portugal to check on the investment.
The increase in interest in investment funds under the golden visa does coincide with an increase in the number of US citizens applying, which may indicate a correlation, especially considering how popular fund investments are in the US.
However, for many other investors, the concept of mutual investment funds may seem a bit foreign, considering they are not among the most common investment options in certain countries, which is why it is important for an applicant considering applying under the fund option to understand the most important criteria to consider when choosing a fund.
Under the golden visa regulations, applicants can qualify by investing in a fund registered with the Portuguese Securities Market Commission, or CMVM. This ensures that the fund follows governmental regulations and is subject to official oversight.
Choosing a fund that is not registered with the CMVM will not only result in an application being rejected but may also lead to major financial losses.
Choosing an appropriate level of risk
Different funds come with different investment options, many of which have varied risk levels.
Understanding the fund risk scaling parameters is key to ensure that an investor's money is safe and well utilised. Funds usually offer investors options throughout the entire risk spectrum, ranging from very low to very high. Risk will always remain, but in the very low risk category, it is highly mitigated.
However, it is also important to note that high risk investments tend to yield much higher returns, so an investor can choose to go for greater profits with higher risk.
The most common methodology, however, is spreading an investment throughout the risk spectrum, with the majority leaning towards low risk. It is typically advised that a person should not invest more than 10% of their investment into very high risk ventures, allowing them to obtain good profit margins without risking the bulk of their money.
Return rates and distributions
Another important factor to consider is return rates. This issue, of course, correlates to risk, but golden visa investors are in a very peculiar situation.
The investment under the golden visa is typically a means to an end, and since investors have multiple investment options, choosing the right fund means getting returns on par with other investment options, namely real estate investments.
Real estate has been the most popular investment option under the golden visa since its establishment in 2012. Over 95% of all applications have come under either one of the real estate options, and although the fund option is gaining ground, an investor can still weigh both options against each other.
In terms of returns, the average annual residential rental returns in Portugal range between 5-8% depending on the location and investment amount. Funds need to be able to compete with those figures.
However, it is important to note that dividends from funds have lower tax burdens than rental income and can be completely negated if a proper double taxation treaty is utilised. This means funds can go a bit lower in terms of ROI percentages while ultimately providing the same gross profit.
The most significant factor in fund ROI is the fund's investment strategy, as it will dictate the average returns investors will get. Some funds focus on low-risk investments that yield constant, yet low, profit. Others may focus on arbitrage gains, investing in properties that have low value at the start of the fund investment period but that could provide massive returns once that period is over. These can provide higher ROIs than average real estate investments, as they base their profit model on rent and appreciation rates for specific real estate investments.
It is important to note that fund ROI isn't annually consistent, as the amount may differ from one year to another, and the overall ROI percentage can only be calculated at the end of the fund investment period, so it is crucial to understand how and when the fund will make the bulk of its profit.
The fund manager
The final important factor to consider is the company managing the fund. Choosing a reliable fund manager is key to safeguarding one's investment and making the most of it.
Many fund management companies even have multiple funds on offer, which allows investors to spread their investment between various options and levels of risk while minimising the investment management fee that most fund managers take.
A complex option made easy
Investing in funds for the golden visa may seem like a complex matter, but at Savory & Partners, we make it simple. Our strong bilingual teams at our Dubai and Lisbon offices help investors find the best investment options. Contact our team of experts, today.