Understanding Key Information Documents (KIDs)

Introduction

Investing in a Portuguese Golden Visa fund – whether a traditional UCITS mutual fund or a private equity AIF – requires careful due diligence. One essential resource for prospective investors is the Key Information Document (KID). The KID is a concise, standardized 3-page document that each fund must provide to retail investors before they invest. Its purpose is to distill a fund’s key features, risks, costs, and potential outcomes into an easily understood format, enabling investors to understand and compare products across the EU. In other words, the KID is mandated by EU law (under the PRIIPs Regulation No. 1286/2014) to help investors make informed decisions and “understand and compare the key features and risks” of investment products. This article provides a comprehensive overview of KIDs in the context of Golden Visa-eligible funds, explaining what information they contain and how to interpret crucial sections like the risk rating and performance scenarios.

What is a KID and Why Is It Required?

A Key Information Document (KID) is a short, pre-contractual disclosure document required under EU regulations whenever a packaged investment product is offered to retail investors. This includes investment funds (both UCITS and many Alternative Investment Funds) offered to individuals pursuing a Golden Visa. The KID requirement comes from the EU’s PRIIPs Regulation (Packaged Retail and Insurance-Based Investment Products Regulation, EU No. 1286/2014), which took effect in 2018. The law obliges fund managers (“PRIIP manufacturers”) and distributors to prepare and share a KID with any prospective retail investor before the investor commits capital. High-net-worth individuals are often still considered “retail” unless they qualify as professional clients, so Golden Visa investors typically fall under this protection and receive KIDs.

The purpose of the KID is investor protection and transparency. After the financial crises, regulators wanted a simple, comparable way to convey risks and rewards of complex financial products. The KID aims to cut through jargon and highlight the most important facts on an investment in plain language. By law, it must be fair, clear, and not misleading, presented in a standard format and in the investor’s language. It is strictly limited to three pages of A4 paper – forcing issuers to focus only on essential information. Overall, the KID acts as a “consumer-friendly” snapshot of a fund: it tells you what you are investing in, who it’s for, how risky it is, what it might cost and return, and other pertinent details, all in a comparable format across all EU funds.

Regulatory Basis: The requirement for KIDs is enshrined in Regulation (EU) No. 1286/2014, and further detailed by Commission Delegated Regulation (EU) 2017/653. The latter provides the standard template and calculation methodologies for the KID’s contents. For example, it prescribes exactly how the Summary Risk Indicator must be computed and displayed, and how performance scenarios should be generated. These rules ensure every fund’s KID is calculated in the same way, allowing apples-to-apples comparisons. Fund managers must keep KIDs up to date (reviewing at least annually) and republish them if anything significant changes. In summary, EU regulation compels Golden Visa fund providers to give you a KID so you have a clear, standardized insight into the product before investing.

Key Information You’ll Find in a KID

KIDs follow a question-and-answer style format with prescribed sections. Here are the key elements typically included:

• What is this product? – A description of the fund’s identity, type, and objectives. This section names the product and manufacturer, and explains the fund’s investment objective and strategy in simple terms. For example, it will state if the fund invests in Portuguese companies, equities, bonds, etc., and what it aims to achieve (e.g. long-term capital growth, income, or capital preservation). It also indicates the fund’s legal form (UCITS or AIF) and any specific structure (for instance, if it’s an ELTIF, feeder fund, etc.). Essentially, this tells you what you’re investing in and how the fund plans to make money.
  
  
• Who is it for? – The intended or target investor profile. The KID outlines what type of investor the fund is designed for – for example, experienced, high-net-worth investors able to tolerate illiquidity, or conversely, ordinary retail investors seeking a conservative investment. In Golden Visa fund KIDs, you’ll often see language that the product is intended for investors who can commit a large sum (e.g. €350k–€500k) and hold for a long period, and who can afford to lose some or all of the investment (since these funds are not capital guaranteed). If an investor does not meet the described profile (for instance, they need quick liquidity or have a very low risk tolerance), the fund likely isn’t suitable for them.
  
  
• Term and Redemption – Information on how long the investment is intended to be held, and the liquidity (or lack thereof). The KID will state the recommended holding period – for Golden Visa funds this is often around 5 to 10 years, aligning with visa requirements and the fund’s life. It will also clarify if the fund has a fixed maturity date (common in closed-end AIFs) or is open-ended with no set term (common in UCITS). Additionally, it tells you if you can exit early. Many private equity AIFs are illiquid, meaning you cannot redeem on demand (or can only do so with penalties or in limited windows). The KID will prominently warn if “you cannot cash in early” or may have to sell at a secondary market price. UCITS funds, by contrast, usually allow daily or regular redemptions, which will be implied by a shorter recommended holding (e.g. 5 years but redeemable anytime) and no early exit warning. Understanding the term and liquidity is crucial: for Golden Visa compliance you must hold for 5 years, and the KID confirms whether the fund structure aligns with that requirement.
  
  
• What are the risks and what could I get in return? – This is the heart of the KID, containing the risk/reward profile of the fund. It includes the Summary Risk Indicator (SRI) on a numeric scale and a narrative explanation of risks, as well as performance scenarios showing possible future returns. We discuss the SRI and performance scenarios in detail in the next sections. In brief, the SRI condenses the fund’s riskiness into a number from 1 (lowest risk) to 7 (highest risk) based on a standardized calculation. The performance scenarios are typically presented in a table, forecasting how a hypothetical investment (e.g. €10,000) might perform under different market conditions (stress, unfavorable, moderate, favorable) over the recommended holding period. This section may also mention the maximum possible loss – for most funds, this is 100% of your investment (i.e. you could lose all your money, since unlike a bank deposit, funds usually have no capital guarantee).
  
  
• What are the costs? – A breakdown of all fees and charges associated with the investment. The KID will itemize one-off costs (e.g. entry or subscription fees, and any exit fees), ongoing costs (annual management fee, custodian fee, etc.), and incidental costs (performance fees or carry). These are often presented as percentages and as monetary figures based on an example investment (e.g. “€10,000 investment over 5 years”). The document also provides a cost summary indicator – effectively the impact of costs on returns (sometimes called Reduction in Yield). For instance, it might show that over the recommended period, total costs might consume X% of your investment’s value. For Golden Visa funds, pay close attention to performance fees (many private equity funds charge ~20% carry on profits) and whether any subscription or redemption fees apply. The KID makes these comparable across funds by using standardized assumptions and presentation.
  
  
• Other relevant information: KIDs also cover a few additional points. They will state whether the fund’s manager or guarantor could default and the impact (e.g. for a typical fund, the assets are segregated, so this risk is low). They include a line on how to complain (providing contact details if you need to file a complaint about the product or advice). And if the product is particularly complex, there will be a “comprehension alert” warning that “you are about to purchase a product that is not simple and may be difficult to understand” – often the case for structured or leveraged products.
  
  

All of the above sections are highly standardized. The Commission’s Delegated Regulation (EU) 2017/653 even provides a template that manufacturers must follow strictly. This ensures that whether you are reading a KID for a mutual fund or a venture capital fund, the layout and headings are the same. In summary, a KID gives you a succinct blueprint of the fund: what it does, who should invest, how long to invest, what the risks and costs are, and possible outcomes. Next, we will dive deeper into two of the most important (and sometimes confusing) parts of the KID – the Summary Risk Indicator and the performance scenarios.

The Summary Risk Indicator (SRI) – A 1–7 Risk Scale

Figure: Example of a 1–7 risk scale used in a KID’s Summary Risk Indicator (with 1 being lowest risk and 7 highest). The Summary Risk Indicator (SRI) is a simple numeral (1 through 7) that conveys the fund’s overall risk level relative to other investments. A rating of 1 indicates “lower risk” (though not risk-free), while 7 indicates “higher risk”. This scale comes with the intuitive notion that lower risk generally means lower expected reward, and higher risk potentially higher rewards (as shown in the figure above). The SRI is designed to provide at-a-glance understanding: for instance, an SRI of 2 might be a very conservative bond fund, a 4 could be a balanced or large-cap equity fund, and a 6 might be an aggressive private equity or emerging market fund.

How is the SRI determined? It is not a subjective guess by the fund manager, but the outcome of a prescribed calculation combining market volatility and credit risk. In regulatory technical terms, the SRI is derived from two components:

• A Market Risk Measure (MRM), scaled 1–7, which reflects how volatile the fund’s value is likely to be. The MRM is typically computed by looking at the fund’s historical price variability or simulating it. In fact, the methodology uses a Value-at-Risk (VaR) approach: essentially, it looks at the potential loss in extreme conditions (99% or 97.5% confidence) over the recommended holding period, then annualizes that volatility. The more a fund’s value can swing or drop in adverse markets, the higher its MRM class. For example, a fund with very stable returns (like a money market fund) might get MRM 1 or 2, whereas a volatile stock or commodity fund might get MRM 6 or 7.
  
  
• A Credit Risk Measure (CRM), scaled 1–6, which applies if the product’s payoff depends on a third party’s credit (for instance, an insurance company’s solvency in an annuity, or a structured note’s issuer). For most investment funds, credit risk is not a major factor – unless the fund has some guarantee or underlying default risk. In a standard equity or bond fund, the main risk is market risk of the holdings, not the fund manufacturer defaulting (fund assets are ring-fenced). Thus, many fund KIDs essentially focus on market risk. But if credit risk is relevant, the rules assign a CRM class (based on credit ratings or collateral) which can push the overall SRI higher. Notably, the SRI aggregation takes whichever risk is more severe – it “is assigned according to the combination of the CRM and the MRM classes” in a matrix. In practice, for most funds the market risk dominates. (Credit risk might matter for, say, a structured note or a capital-guaranteed fund where the guarantor’s default would hurt investors.)
  
  

The result of these calculations is a single number on the 1–7 scale. Each increment represents a material step up in risk. An SRI of 1 is extremely safe (for example, a short-term treasury fund or insured product – though even these aren’t fully risk-free due to inflation/FX risk). An SRI of 2–3 would correspond to low-risk investments (say, a high-grade bond fund or diversified income fund – limited fluctuations). Middle values 4–5 indicate medium risk – e.g. a typical global equity fund might be 5. Values of 6–7 mean high to very high risk: significant volatility and chance of capital loss, but also higher upside. Category 7 might be reserved for highly speculative or leveraged products (for instance, certain derivatives or crypto-heavy funds), whereas category 6 is often the level for aggressive funds like private equity, venture capital, or niche emerging market strategies.

Importantly, the KID will include a narrative explaining the SRI. For example, a private equity fund’s KID might say: “We have classified this product as 6 out of 7, which is the second-highest risk class. This classification rates the potential losses from future performance at a high level, and poor market conditions are very likely to impact our capacity to pay you.”. In plainer terms, a high SRI means there is a high probability of significant losses in adverse scenarios – you could lose a lot of money due to market movements. Conversely, a low SRI means losses are unlikely to be severe under normal market conditions.

It’s worth noting that liquidity risk (whether you can exit easily) is not directly part of the numeric SRI, but if a product is illiquid, the KID must flag this in the text (e.g. “you may not be able to sell early”). Also, the SRI assumes you hold the product for the recommended period – selling earlier can alter the risk (often increasing the chance of loss if timing is bad). The regulations allow manufacturers to increase the SRI if they feel the formula underrates the true risk (but they cannot lower it arbitrarily). In summary, the SRI is a handy indicator of riskiness: use it to compare funds, but always read the accompanying text for context. An SRI 6 fund will likely feel very volatile and one should be prepared for ups and downs, whereas an SRI 2 fund should be relatively steady (though no investment is completely without risk).

Performance Scenarios – Possible Future Returns

Alongside the risk indicator, the KID presents performance scenarios to show what you might get back from the investment under different conditions. These scenarios illustrate potential outcomes at the end of the recommended holding period (and in many cases at intermediate points like 1 year and half the period). The KID typically provides four scenarios, defined by the regulations:

• Stress scenario: An extremely adverse outcome in severe market conditions (the kind of worst-case that might happen in a financial crisis or crash). This scenario demonstrates what might happen in extreme downside cases. Often, it shows a significant loss. For example, the stress scenario might indicate that after 5 years, your €100k investment could shrink to, say, €50k. The stress scenario corresponds roughly to a 5th percentile outcome – meaning only 5% of cases would be worse. It essentially answers, “How bad could it get in a really terrible set of events?”
  
  
• Unfavourable scenario: A bad outcome (but not the absolute worst) given how the markets might behave. This could be thought of as a lower quartile (perhaps ~10th percentile) result. It shows the kind of return that might happen if the investment performs poorly – for instance, a modest loss or very small gain. It’s “unfavorable” but not catastrophic. In practical terms, maybe your €100k ends up around €90k in this scenario. It helps set expectations on the downside in a weak market or if the manager underperforms.
  
  
• Moderate scenario: This is essentially the median or expected scenario (often tied to the 50th percentile). It represents a normal case if things go as forecasted or on average. Neither particularly good nor bad, this scenario shows what a typical outcome might be. For many growth funds, the moderate scenario might still be a decent positive return (e.g. €100k -> €150k) if historical averages are positive. But for a conservative fund, moderate might be a smaller gain. This scenario helps investors gauge a baseline expectation.
  
  
• Favourable scenario: This reflects an upbeat outcome – how the investment could perform if things go well (approximately a 90th percentile good-case). It’s not the absolute maximum imaginable, but a strong result that could happen in a thriving market or with very successful investments. For instance, the favourable scenario might show €100k growing to €200k+ in a private equity fund that hits its targets. It essentially illustrates the upside potential if luck and skill are on your side.
  
  

The performance scenarios are generated according to detailed rules. Fund managers either use historical data or Monte Carlo simulations to project the range of outcomes. They must incorporate all fees into the numbers, so the returns shown are net of costs. Additionally, the scenarios are usually shown for at least three time horizons: for example, after 1 year, after e.g. 4 years (half the recommended period if the full period is long), and at the end of the recommended holding period. The idea is to see not just the end result but also interim volatility. In the KID’s table, you’ll see each scenario’s outcome as both a monetary amount and an average annual percentage return.

It’s crucial to understand that these scenarios are not promises or precise predictions – they are illustrations based on the product’s past and the regulatory model assumptions. Real life can of course turn out differently. In fact, one criticism of the initial PRIIPs KIDs was that during extended bull markets, the “moderate” and “favourable” scenarios for equity funds looked overly optimistic (because they were based on strong past performance), potentially misleading investors about future returns. Regulators have since adjusted methodologies to make scenarios more realistic. Always interpret them as a range of possible outcomes, not guarantees. The stress scenario especially is a reminder: even if it’s unlikely, be prepared for the worst-case. For Golden Visa investors, who often cannot easily withdraw funds, understanding the downside risk is vital.

To make this more concrete, let’s consider an illustrative example comparing a generic UCITS fund vs. a private equity AIF:

Example: Suppose you invest €100,000. A balanced UCITS global equity fund (recommended hold ~5 years) might show: in an unfavourable scenario, perhaps your €100k drops to €85k (–15%), in a moderate scenario it grows to ~€130k (+30%), and in a favourable scenario maybe ~€160k (+60%). A private equity AIF (recommended hold ~8 years) might have a wider range: unfavourable perhaps €90k (a small loss after 8 years), moderate maybe €200k (doubling, reflecting a high target IRR), and favourable could be €300k+ (tripling if all goes very well). Meanwhile, the stress scenario for the AIF could be quite harsh – e.g. only €50k back in a crash – whereas for the UCITS maybe €70k in a stress case, since it’s more diversified and liquid. These numbers are hypothetical, but they mirror how KIDs might portray outcomes: the AIF shows both greater upside and greater downside than the UCITS.

Below, we summarize some key differences between a typical UCITS fund and a AIF, including an example of their KID performance projections:

Comparing UCITS vs. AIF Funds in Key KID Elements

To illustrate, here’s a side-by-side comparison of two hypothetical funds: (1) a UCITS-regulated public equity fund, and (2) a AIF . This highlights how their KIDs might differ in each section:

(Note: The above performance numbers are illustrative and simplified. Actual KIDs would calculate scenarios based on historical data or simulations. The favorable/unfavorable labels correspond to roughly 90th/10th percentile outcomes. The UCITS fund, being more stable, shows a narrower outcome range, whereas the AIF’s outcomes are more extreme both on the upside and downside.)

As the comparison shows, UCITS and AIF funds can differ markedly in their KID profiles. UCITS funds are designed to be retail-friendly – they offer liquidity, diversification, and typically fall in the middle of the risk spectrum. Their KIDs will reflect that with moderate SRIs and more predictable performance ranges. In contrast, AIFs (often venture or private equity focused) sacrifice liquidity and safety for higher return potential – their KIDs accordingly carry high risk ratings (often SRI 6) and a caution that you could face both significant losses or gains. Neither is “better” universally; the right choice depends on an investor’s goals and risk appetite.

Why Do Private Equity AIFs Often Have High SRIs (Risk 6)?

Investors new to private funds are sometimes surprised to see a risk rating of 6 out of 7 on a KID – especially if the fund markets itself as investing in “safe” assets like mature companies. There are several reasons why private equity and similar AIFs tend to receive a high SRI:

• Lack of Historical Data = Conservative Classification: Many newly launched or illiquid funds don’t have a long track record of market prices. Under the PRIIPs rules, if there isn’t sufficient price history to statistically estimate volatility, the product is automatically categorized as very high market risk. In fact, the regulation states that if data is insufficient, the product is considered “Category 1” (which paradoxically means highest risk class, MRM = 6). This is a “better safe than sorry” approach – regulators would rather assume high risk in the absence of data. Most Golden Visa funds are relatively new AIFs (often created in the last few years) with no trading history, so they typically default to an SRI of 6 by regulatory methodology. It’s not necessarily that the managers think the fund is as risky as a crypto fund, but the formula compels a high rating when VaR can’t be measured confidently.
  
  
• Illiquid, Long-Term Assets: Private equity investments are inherently illiquid and long-term, which introduces risk in itself. You cannot readily sell underlying holdings (e.g. stakes in a company) if you need cash; there is no daily market price. The KID’s risk indicator primarily captures market volatility, but illiquidity is flagged through warnings rather than the number. Still, illiquid assets often have uncertain valuation – their prices might be appraised infrequently and can jump around when a new funding round or revaluation happens. This uncertainty and lack of smooth price discovery often justifies a higher risk score. As the European Securities and Markets Authority has discussed, the current SRI methodology struggles with illiquid PRIIPs and often ends up assigning a high risk class by default. Investors should interpret SRI 6 for a private fund as indicating “high uncertainty – values could swing and you can’t exit easily.”
  
  
• Concentration and Leverage: Many AIFs are more concentrated than UCITS. For example, a Golden Visa venture fund might invest in only 5 or 10 projects. A single bad investment could significantly dent returns – this idiosyncratic risk is higher than in a fund holding 100+ stocks. Some AIFs might also employ leverage or invest in inherently risky ventures. All these factors contribute to higher volatility of returns (or at least to a high potential loss if things go wrong), which the risk indicator aims to capture. The nature of underlying assets (e.g. startups, which are far more volatile and failure-prone than blue-chip stocks) also pushes risk higher. In short, private equity funds often swing for higher returns by taking more concentrated bets – hence the KID appropriately flags them as high risk.
  
  
• High Target Returns Correlate with High Risk: These AIFs usually aim for high returns (say, 10–20% annually) as part of the value proposition (after all, one rationale for Golden Visa investors choosing funds over just buying government bonds is the chance of a good investment return). In finance, higher expected returns only come with higher risk. The SRI is basically telling you that to chase those high gains, you’re accepting a high risk of loss. So the SRI 6 is a reflection of that risk-reward trade-off: the fund might deliver strong gains, but you must be comfortable with the risk of significant downside.
  
  

An SRI of 4 vs. 6 is useful for comparison, but not a verdict of absolute safety. A Portuguese-equity UCITS that benefited from a benign five-year window can still fall 40 % if global markets sour—as history shows. Meanwhile, a private-equity AIF’s SRI 6 warns of wide outcome dispersion and illiquidity, yet the strategy may withstand a stock-market shock better because its portfolio companies are not mark-to-market daily.

In summary, private equity AIFs get high SRIs because the methodology errs on the side of caution when risk can’t be precisely measured, and because by their very nature these funds embody higher risk (illiquidity, concentration, ambitious returns). Remember that SRI is a comparative scale: a 6 does not mean the fund is doomed, it means relative to a standard equity fund (which might be 5), this one has more uncertainty. Many investors accept that risk for the sake of high returns and the residency incentive; just go in with eyes open to the volatility and locking period involved.

Conclusion

Key Information Documents are a critical tool when evaluating Golden Visa fund options. They distill complex investments into a standard, digestible format – much like a “nutrition label” for funds, as some call it. By reviewing a KID, an investor can quickly grasp a fund’s strategy, who it’s meant for, its risk level, potential ups and downs, and fee drag on returns. This transparency is exactly what EU regulators intended: to empower investors with clear, comparable information.

A KID is a necessary filter, but far from sufficient. Golden-Visa funds sit on a wide quality spectrum, and—as we detail in our guide to “grey-area fund practices to watch for”—some vehicles that look perfectly respectable on paper conceal leverage, related-party deals or weak governance. A fund with an SRI of 4 and a reassuring “moderate” scenario may still harbour hidden concentration or valuation risk; equally, a fund labelled SRI 6 could be run by a world-class team with disciplined controls. The KID flags headline metrics—volatility, cost drag, stress losses—but it cannot capture manager integrity, operational robustness, or alignment of interests. Treat it as the starting gate, then drill into the sponsor’s long-term track record, independent audit history, custodian arrangements, and reputation before committing capital.

References:
https://eur-lex.europa.eu/legal-content/EN/LSU/?uri=CELEX:32014R1286#:~:text=WHAT%20IS%20THE%20AIM%20OF,THE%20REGULATION

https://www.deloitte.com/lu/en/Industries/investment-management/research/srri-sri-calculation-under-priips-ucits.html#:~:text=to%20avoid%20any%20ambiguity