Letters of Credit: everything you need to know about LCI and LCA

Do you know what the acronyms LCI and LCA mean? They are the acronyms for two investment products that are becoming more and more accessible: the Real Estate Credit Bill and the Agribusiness Credit Bill.

Letters of Credit are one of the most sought after alternatives by Brazilian investors. This is because in addition to being free of fees and taxes, they still have a much higher profitability than other products – such as savings, for example.

If you want to become an expert on the subject and learn how to safely invest in LCI and LCA, follow this article to the end and check out in detail what Letters of Credit are and their advantages.

What are Letters of Credit?

Letters of Credit are an alternative to private securities for investments. They are offered by financial institutions that use these resources to finance two major sectors of the national economy: the real estate sector and the agribusiness sector.

They are free of fees and taxes and have a pre-established expiration date. For this reason, the Letters of Credit are considered an excellent opportunity for novice investors or those with a conservative profile, as they are fixed income investment products.

Before checking out all the details about LCI and LCA, first understand how fixed income investments issued by banks work: fixed income pre-defines, at the time of purchase, the term and calculation of remuneration paid to the investor.

In this way, whoever decides to invest in fixed income assets, is able to predict from the beginning what the application’s maturity date is, and also how much it will redeem. Your profitability can be fixed through a monthly percentage or some index such as the Selic, the CDI, inflation, or others. The investor’s redemption value is therefore remunerated with interest.

When buying bonds issued by banks, the investor is technically lending money to financial institutions to cover the financing offered to their clients. In general, banks allocate these securities where appropriate, with the exception of the Letras de Crédito bonds, which have specific purposes.

Modalities

In Brazil, the Letras de Crédito bonds are intended to cover the financing of two major national economic sectors: the real estate sector (LCI) and the agribusiness sector (LCA). Next, learn more about each of the two modalities.

Mortgage Loan Letter

When someone invests in one or more applications in LCI, that is, in Letters of Credit for Real Estate, the bank issuing these bonds uses this fundraising to cover financing, construction or remodeling of its clients’ properties, whether individuals or legal entities.

Agribusiness Credit Letter

Those who invest in LCA, that is, in Letters of Credit for Agribusiness, make it possible to finance loans related to agribusiness. This means that the funds raised in this modality encourage the production, processing, industrialization and commercialization of agricultural and livestock inputs.

For the investor, the dynamics of purchase and redemption of securities occurs in much the same way for both LCI and LCA. What will differentiate each modality is the value of each security and the purpose of resources by financial institutions.

How much does it cost to invest in LCI and LCA?

Both types are exempt from Income Tax (IR) and Tax on Financial Operations (IOF). The Letters of Credit are still protected by the Credit Guarantee Fund (FGC), so the investor is assured that he will receive up to R $ 250 thousand per CPF and per financial institution in case of bank default.

Although it has some pre-set options, most of the Letters of Credit pay based on the profitability of the Interbank Deposit Certificate (CDI), which accompanies the basic interest rate (Selic).

Whatever the card, you must have enough full value available to purchase each title. The minimum starting capital for each investment may vary according to the type and financial institution in question.

Several financial institutions offer securities with lower interest rates and shorter terms starting at R $ 1 thousand reais. Securities with higher interest rates and longer terms, which therefore have higher yield, start at R $ 5,000.

Generally, additional and optional deposits that can be made until the maturity date, commonly called contribution, cannot be made with a value lower than the amount invested in the initial purchase of the security.

In other words, financial institutions normally do not accept contributions lower than the initial amount of the Letter of Credit. To circumvent this issue, a good option is for the investor to initially invest smaller amounts in other products such as Savings Account and Treasury Selic and then, when reaching the minimum necessary, apply the earnings in LCI or LCA.

It is important to note that the exemption from fees and taxes is promoted by the government in order to encourage and move the economy of strategic sectors. However, some banks and investment brokers charge a custody fee for maintaining the letter. Stay tuned and ask if the contracted service charges for this custody.

How does bond redemption work?

Letters of Credit, whether for Real Estate or Agribusiness incentives, have a defined grace period of 3 months or more. This means that the investor has no right of redemption before this period. To avoid loss of income, the ideal is to keep the money invested until the security’s maturity date.

As we said earlier, the amounts and maturities vary according to each Letter of Credit issued by financial institutions. It is worth noting here that the longer the security matures, the greater its profitability. Therefore, the ideal title is at the discretion of the need or purpose of each investor.

When the LCI or LCA bond matures, the investor has the options to redeem or reinvest the earnings. If the investor chooses to redeem, he will receive the full amount of the earnings. If you choose to reinvest, the earnings will be invested in other similar securities offered by the same issuer.

What is the best option?

In summary, the two modalities have the same advantages:

  • high profitability,
  • exemption from IR and IOF,
  • guaranteed by the FGC.

In this case, regardless of the modality – LCI or LCA, what will determine the choice of security is the main objective of the investor.

For short-term goals such as a vacation trip or the purchase of consumer goods, the one-year mortgage bill can be a good income option.

However, if the investor has long-term objectives such as a financial reserve for retirement, some Agribusiness Letters of Credit are good alternatives to guarantee the financial stability of the coming years.

In view of this scenario of advantages that include the security of profitability and exemption from fees and taxes, we can say that the Letters of Credit are excellent alternatives for those who are starting in the investment segment or for those who have a more conservative investor profile and want diversify the portfolio.

Now that you know one of the most profitable fixed income and low risk investments in the country, how about diversifying the portfolio or planning to purchase one or more LCI and LCA securities available on the market? Take the opportunity!

 

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