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Treasury Financial Letters (LFT) are a popular investment choice that offers returns linked to the Selic rate, making them appealing to a variety of investors. It is essential to fully comprehend how LFTs work and their unique features before incorporating them into your investment portfolio.
This article explains the definition and functioning of LFTs, as well as provides guidance on how to invest in them. By understanding this information, you can determine if they align with your financial objectives.
Shall we proceed?
What does LFT stand for?
The Treasury Financial Letters (LFT) are government-issued public bonds used to raise funds and support federal activities.
Its earnings are linked to the Selic rate, the primary interest rate in the Brazilian economy, so its profit fluctuates in accordance with this benchmark.
What is the functioning process of LFT?
Unlike other public bonds with fixed income, LFTs have variable income that changes based on fluctuations in the Selic rate.
This makes them appear as a choice for individuals looking for an investment that mirrors the prevailing interest rate.
Value of LFT
The purchase price of an LFT may not be the same as its redemption value, as the price of the bond changes with fluctuations in the Selic rate.
When the interest rate increases, the value of LFT increases accordingly. Conversely, when the Selic rate falls, the value is adjusted to reflect the new level.
Text: the state of being mature
These securities have predefined maturity dates upon issuance but can be sold before that date in the secondary market.
The investor has the option to trade directly with the Treasury or through brokers and banks, providing flexibility in portfolio management.
Paraphrased: Assurances or promises of certainty.
The National Treasury ensures the credit risk of LFT, which is directly linked to the government’s ability to make payments, in addition to its profitability.
This sets them apart from other fixed-income investments that offer private or restricted guarantees provided by the Credit Guarantee Fund (FGC).
Smallest possible requirement
The minimum application amount may change depending on the fractional lot size offered in the Direct Treasury.
Interest is earned when the title is held until maturity or sold early. Income tax is applied based on income, using a regressive table where the tax rate decreases as the length of time the investment is held increases.
Paráfrase: Disponibilidad de efectivo.
The daily availability of LFTs liquidity is an important consideration, as the National Treasury ensures the continuous renewal of these securities through the Direct Treasury.
This enables the investor to sell their investment before it reaches maturity, but the selling price may fluctuate depending on the timing of the sale.
What are the pros and cons of LFT?
The advantages or disadvantages of Treasury Financial Letters (LFT) depend on the investor’s profile and the intended use of the funds.
Benefits
Text: Investment that occurs after a particular event.
One key benefit of LFTs is that they are linked to the Selic rate, ensuring their profitability moves in line with it.
Paraphrased: This helps lower the chances of actual investment value decreasing with high interest rates, unlike fixed securities, which could lose value as interest rates increase.
Anticipation of income consistency
Another important aspect is the consistency in earnings. While the Selic rate may fluctuate, investors can expect their income to align with this benchmark, thus avoiding unexpected changes linked to market fluctuations that impact assets tied to variable income or fixed-income securities affected by inflation.
Daily availability of funds
The LFT offers daily liquidity through the Direct Treasury, with the National Treasury providing a guarantee of repurchase.
This implies that the investor has the option to sell the security before it reaches maturity, without needing buyers in the secondary market. Nevertheless, the selling price may vary from the initial purchase price due to market conditions.
LFT is ensured by the federal government, resulting in a low level of credit risk.
This sets it apart from other fixed-income assets issued by private institutions, which could rely on the Credit Guarantee Fund (FGC) for protection or face potential default by the issuing institution.
Taxation is based on the income tax return form for fixed income investments.
The rate of income tax decreases as the investor holds onto the investment for a longer period of time, starting at 22.5% for investments held up to 180 days and reducing to 15% for investments held over 720 days.
Drawbacks
Alteration in the cost of the title.
Even though LFT offers daily liquidity, the market price can fluctuate over time. If an investor sells LFT before its maturity, they may receive a value that differs from their initial expectations due to changing market conditions.
This is because titles may experience temporary setbacks, even if their profitability is linked to the Selic rate.
Text: Financial success
The return on LFTs typically lags behind that of riskier investments. As post-fixed government bonds, their profitability is tied to the Selic rate, which could be less than the returns on pre-fixed or inflation-linked securities, depending on the economic conditions.
The occurrence of income tax can affect the final investment return. Moreover, there is also the imposition of IOF on withdrawals made within 30 days, which can lower profits in very brief investment periods.
Fee for custody services provided by B3.
Another aspect to take into account is the custody rate of B3, which pertains to investments in the Direct Treasury.
At present, B3 applies an annual fee of 0.2% on the invested amount, which can affect the overall return, particularly for investors who hold the investment for extended periods.
How can I invest in LFT?
Investing in Treasury Financial Letters (LFT) involves selecting a middleman, evaluating the associated costs, and determining the investment strategy.
Since these are government bonds, the investor has the option to trade them either directly through the Direct Treasury or on the secondary market, depending on their profile and desired timeframe.
Selection of establishment
The initial step to investing in LFTs is to find a financial institution that permits the trading of these securities.
Banks and brokers that are part of the Direct Treasury program provide this option, although there may be differences in fees and services offered.
Some brokers impose extra charges, while others waive that expense for the investor.
In the Direct Treasury, investors can buy directly through the program’s website or app.
After creating an account with a qualified broker, the investor can move funds and log in to the platform to choose from the range of securities on offer.
The system enables you to easily see due dates, profitability, and prices, which helps in making purchasing decisions.
Explanation of the value of an investment
LFTs are available in smaller portions, making it possible to invest smaller amounts.
The Direct Treasury offers small portions of securities, typically around 1% of the total value, making it easier for new investors to get started.
It is crucial to verify the minimum required balance set by the financial institution being utilized.
At the moment of buying, the investor determines the quantity of securities they wish to purchase.
The cost of an LFT fluctuates daily depending on Selic fluctuations and market predictions. The invested amount is adjusted automatically to keep up with the current interest rate, ensuring that the earnings stay in line with the market.
Expenses required
Besides the initial investment, there are expenses linked to LFTs. The primary cost is the custody fee charged by B3, which is currently set at 0.2% annually based on the invested amount.
Some brokers may also impose intermediary fees, but many now waive them for investments in the Direct Treasury.
Another important expense is the income tax, which is levied on earnings based on a regressive schedule.
The starting interest rate is 22.5% for investments held for up to 180 days, decreasing gradually to 15% for investments held for more than 720 days.
For rescues completed prior to 30 days, there is also the application of IOF, which decreases as time passes and care is given after that time frame.
Observing and saving
Upon buying, the investor can monitor the performance of LFT through either the Direct Treasury platform or their selected broker.
The documents display the current worth of the securities and the total profits gained.
Since the LFT offers daily liquidity backed by the National Treasury, it allows for the possibility to sell the bond before it reaches maturity if needed.
Early redemption may lead to varying outcomes compared to initial expectations, as the value of LFT is influenced by market conditions. If the sale takes place during a period of declining Selic rates, the return on investment may be lower than anticipated.
On the other hand, when the interest rate is high, the value of the title will increase.
When it reaches the expiration date, the National Treasury will deposit the full amount into the investor’s account after deducting the necessary taxes.
Sentence: If you want to keep investing, you can reinvest the money you receive in new LFTs or other securities currently available in the market.
Paraphrased: Strategy for investing
The choice to invest in LFTs should take into account the investment timeline and the current Selic rate.
These titles are suggested for individuals seeking an income that follows the fundamental interest of the economy, without being subjected to significant market volatility.
During times of high interest rates, they can be a choice to maintain the value of the invested money.
Investors looking for easy access to cash and reliable returns can incorporate LFTs into their investment plan, along with other fixed or variable income assets.
Diversification assists in managing risks and optimizing returns in the long run.
Investors can buy LFTs directly and at a reasonable cost, as long as they are aware of the expenses and features associated with this security. It is important for investors to monitor Selic rate fluctuations and assess the economic environment, as these factors impact the potential returns and should be considered before making an investment.
Summary
Hence, Treasury Fixed Income Securities (LFT) are an investment choice at the Selic rate, providing daily returns and flexibility. Its process is uncomplicated, enabling purchase through Direct Treasury or the secondary market.
Furthermore, when considering investing in this particular asset, it is important to carefully consider expenses, timeframes, and potential changes in earnings in the event of early withdrawal. The selection of a brokerage firm and strategic investment planning can also have a significant impact on long-term outcomes.
In conclusion, individuals looking for stability and regular income based on basic interest can incorporate LFTs into a fixed income portfolio. Keeping an eye on the Selic rate and economic conditions can assist in making well-informed choices regarding this investment.
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