What is a euro-denominated fund?

A euro fund is an investment vehicle found primarily in life insurance and capitalization contracts. Its main advantage? Your principal is guaranteed by the insurer, according to the terms of the contract. This means you don’t risk losing the money you’ve invested if financial markets decline. However, this security comes at a cost: the potential return on a euro-denominated fund is generally lower than that of unit-linked funds. Here are the key features to keep in mind:

• The invested capital is guaranteed by the insurer, sometimes excluding management fees;
• Savings are primarily invested in bonds;
• Interest paid each year is permanently earned;
• The money remains available and can be withdrawn through a surrender of the life insurance policy.

How does a euro-denominated fund work?

When you invest money in a euro-denominated fund, the insurer is responsible for investing it. The goal is twofold: to protect investors’ principal while generating an annual return.

What does a euro-denominated fund consist of?

To ensure this security, insurers invest a large portion of the premiums they collect in government or corporate bonds. Historically, these securities have made up the bulk of the euro-denominated fund portfolio.

A smaller portion may be invested in real estate, stocks, or other assets. This diversification allows investors to seek higher returns while keeping the majority of their investments less exposed to market fluctuations.

How is interest paid?

Each year, the insurer sets the rate of return paid on its euro-denominated fund. This rate depends, in particular, on the income generated by the fund’s investments and the profit-sharing portion. The profit-sharing portion corresponds to the share of income generated by the fund’s assets that the insurer pays out to policyholders. However, a portion may be set aside to be distributed in subsequent years.   

Once credited to your account, the interest is permanently earned and, in turn, begins to generate interest. This is known as the ratchet effect. In other words, gains recorded in one year cannot be reversed the following year due to a market downturn. 

What are the benefits of a euro-denominated fund?

Euro-denominated funds are primarily intended for savers who prioritize safety. They can also be used to protect a portion of one’s assets alongside investments that are more exposed to market fluctuations.

Guaranteed principal

This is the main advantage of a euro-denominated fund. Unlike unit-linked funds, its value does not fluctuate directly in response to financial markets. The insurer commits to guaranteeing the principal under the terms specified in the contract.

Available savings and accrued interest

Another advantage: your money isn't tied up. You can make a partial or full withdrawal from your life insurance policy whenever you need to.

In addition to this availability, there is the compounding effect. Once interest is credited, it increases the guaranteed principal and, in turn, earns interest in subsequent years.

What are the disadvantages of a euro-denominated fund?

While euro-denominated funds are considered safe, it is important not to overlook their limitations. Before investing, it is essential to weigh capital protection against the desired return.

More limited return potential

Lower risk generally comes at the cost of lower returns. Returns vary from year to year depending on the funds and the insurer’s performance.

Inflation must also be taken into account. Even if your principal does not decrease in euros, a return that lags behind the rate of inflation can result in a loss of purchasing power.

Access conditions vary depending on the contract

Not all policies necessarily allow you to invest 100% of your savings in a euro-denominated fund. Some insurers require that a portion of your premiums be invested in unit-linked funds in order to gain access to their funds or to receive a higher rate of return.

Euro-denominated funds or unit-linked funds: What are the differences?

Euro-denominated funds and unit-linked funds can be combined within a single multi-asset life insurance policy. However, they operate very differently.

The choice therefore depends on your profile, your goals, and your investment time horizon. You can also divide your savings between the two to strike a balance between safety and returns.

How do you choose a euro-denominated fund?

Not all euro-denominated funds have the same performance or the same terms. Return is , of course, a key factor in making a choice, but it should not be the only one.

See also: 

• management fees;
• the exact level of principal protection;
• any applicable access requirements. 

The fund's track record can also give you an idea of its consistency, though it does not predict future results.