If the political context presents movements, different spheres can be impacted. Such as the stock market. In the case of Chile, this is a reality with the possibility of a Tax Reform.
This reform has had setbacks and advances and has not yet been approve. But it could be and it is not yet known what its final form will be. Read this article and learn more about investment funds in Chile, how changes in government policies affect the market and how you can deal with it.
Illustration of the effects of political changes on investment funds in Chile
There is a lot of talk about investment funds, but there is not necessarily a clear idea of what they are. An investment fund can be public or private, and is a fund made up of contributions from investors and manage by experts. With this money, an investment portfolio is create made up of different national or international instruments, and these can be of different types: such as shares. Debt, real estate and private equity or business development, for example.
Direct impact of government policies on funds
Every investment involves risk, and investment funds are not exempt from this. In this sense, investment funds are usually impact by factors such as volatility , duration and investment policy (that is, the investment strategies of the fund itself). But not only that: they are also influence by what is known as country risk.
What does this mean? That investments in emerging countries have an additional risk link to possible economic. Social and political instability in the region in which they invest. And this includes changes in the government policies of a nation.
In the case of Chile, one of the most significant changes has been the Tax Reform project
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Currently call Fiscal Pact , since part of this proposal impacts investment funds. Thus, and according to the Income Tax Law and article 107, the proposal states that taxpayers who are taxed for investments in funds that currently meet the requirement of having a stock market presence or investing in instruments with a stock market presence, will go from paying 10% tax on capital gains to 22%. This could cause a distortion in prices due to not having enough transactions to set them, which could affect Chilean and foreign investors who have invest in these instruments. Additionally, liquidity and financing problems for new projects could also arise, for example, through IPOs.
Likewise, with the Tax Reform, private investment funds (but not public funds) would be taxed with the first-category tax, according to the general regime. However, funds that for at least 300 days within a year maintain 85% of the value of their assets in venture capital investments will continue not to be subject to the first-category tax.
In the case of foreign investment in investment funds from Chile
Under the current law foreign investors have a preferential rate on profits , which are 10% or 34.3% (if they are the fund’s own income or receive from companies), while with the reform it could go up to 35% or 43%, depending data warehouse model design on the investor’s residence. The result? This could lead to a loss of competitiveness for the country with respect to others in terms of foreign investment.
This proposal has been bogged down in legislative, executive and business discussions, without yet reaching a conclusion. All this has meant that the initial project is not the current one and, if approve. It is still unknown what its final form would be.
Market reactions to political changes
Chilean market
It is to be expecte that markets will react to political changes that occur in a country. In the case au emai list of profound changes, such as tax reform, the following occurs: if the reform is rejecte or its progress is halte. The stock market generally tends to react positively, as everything remains the same, providing security and stability, guaranteeing that what has exist until that moment is maintaine.
The reform is approve or advance, the market
May retreat and behave in a slower manner, because the rules of the game that may have been more advantageous up to that point are change and, in addition, the possibility of uncertainty, disenchantment and loss of competitiveness with respect to other countries is open.
This does not mean that the situation will not balance out over time , but the market tends to react to political changes, especially at first and quite quickly.
Recommende strategies for managing funds in times of political change
While there is no magic formula for making the right moves in contexts of political change and eliminating risk. A general strategy would be to remain careful and attentive at every step taken. This means considering some points such as:
Research the financial market
Analyzing the risks in general and the risk of the country in particular. Specifically regarding changes in government policies (as is the case of Chile. And the consequences that this has on your investment funds.
Investing for the long term is a way to better navigate political movements at a given time and thereby avoid potential volatility.
