Funds Most Popular In Portugal

Investing in funds has clearly become the favored method for applying to Portugal's ARI (Golden Visa) Program. Since the legal changes in 2023, more than 99% of applications have been submitted through fund investments.

Over the past two years, numerous funds have been established specifically for Golden Visa investors, creating a competitive environment that has led to increasingly innovative fund structures.

In this scenario, several concerning issues have emerged, making it crucial for potential investors to thoroughly examine these three critical red flags:

1. Fund’s compliance and eligibility for Portugal’s Golden Visa program.

While legal opinions are not typically binding, those from certain authoritative bodies can be deemed conclusive and provide reassurance to investors. Prospective investors should always seek two legal opinions:

a. One from a Big Four accounting firm to verify the fund’s by-laws and ensure compliance with the regulatory framework.

b. One from a leading administrative law firm to confirm eligibility under the Golden Visa legislation, especially given the numerous amendments to the Decree-Law over the past five years.

These are the types of entities relied upon by official bodies such as the immigration authority (AIMA) and the markets regulator (CMVM) when evaluating a fund’s compliance and eligibility.

The recommendation is: Never invest in a fund — whether open or closed, regardless of sector — unless it provides both legal opinions: One from a Big Four firm and another from a top-tier administrative law firm.

2. Buy-back mechanisms must be carefully assessed.

These mechanisms are legal and allowed, but their structure and implementation require careful examination.

Whatever the mechanism, it must be clearly stated in the fund's by-laws.

If it involves side agreements, side letters, or contracts with promoters/investees or other third-party vehicles, these documents — and any rights derived from them — are beyond the immediate and direct action of the regulator (CMVM).

In such cases, any disputes must be resolved through the Portuguese court system, potentially resulting in lengthy and uncertain legal proceedings.

The recommendation is: Never invest in a fund with a buy-back mechanism that relies on third-party entities, side letters, or external agreements.

Invest only if all terms are transparently and explicitly stated in the fund’s by-laws.

3. Important Considerations When Investing in Open-Ended Funds in Portugal

Open-ended funds may appear appealing due to their flexibility, but in the Portuguese context, they present significant risks that investors should carefully consider.

a. Low Liquidity in the Portuguese Market. Funds investing in Portuguese-listed equities face a limited and illiquid market. Trading volumes are low, and few companies are actively traded. Exiting positions — especially in times of volatility — can be slow and costly.

b. Limited Liquidity in Public and Corporate Debt. When funds focus on sovereign or corporate debt, the situation is similar. Portugal’s bond market is relatively small, and secondary trading is limited, meaning liquidity is not guaranteed when redemptions are requested.

c. Low Profitability - The financial instruments typically used in these funds — especially public bonds or low-yield corporate debt — often deliver modest returns. This can erode the value of the investment over time, particularly when compared with alternative options available in international markets.

d. Liquidity Mismatch and Redemption Risk. Open-ended structures allow investors to redeem regularly, but the underlying assets may not be liquid. This creates a mismatch, placing pressure on fund managers and potentially impacting all investors during periods of high redemption.

The recommendation is: Investors should carefully assess the fund’s asset composition and liquidity strategy, and be cautious of open-ended funds whose assets are tied to illiquid markets or instruments. Understanding the fund’s redemption policy and its ability to meet redemptions is fundamental.