Risks of a SICAV: What Every Investor Should Know

The main risks of a SICAV explained

1. The risk of capital loss

This is the fundamental risk of any investment in securities. A SICAV’s net asset value can fall, and when you redeem, you may get back less than you invested. This risk applies to all SICAV categories, to very different degrees.

For an equity SICAV, a drop of 30% to 40% over one year is possible during a crisis period (2008–2009, 2020). For a long-duration bond SICAV, a drop of 15% to 20% is possible if rates rise sharply (as in 2022). For a money market SICAV, the loss is usually marginal, but not impossible.

The only real remedy for capital loss risk is the investment horizon. Over 10 or 15 years, equity markets have, in the vast majority of historical contexts, absorbed crises and delivered positive returns. Over 1 or 2 years, the outcome can be very different.

2. Market risk (or systemic risk)

Market risk refers to the possibility that an entire market (equities, bonds, etc.) falls at the same time, dragging down all the funds exposed to it, regardless of how well they are managed. This risk is called “systemic” because it affects the financial system as a whole, not a specific company or sector.

The 2008–2009 financial crisis, the Covid shock in March 2020, and the double equity-bond correction in 2022 are examples of systemic risk materializing. In these phases, even well-diversified and well-managed SICAVs lose value simply because all assets fall at the same time.

Diversification reduces specific risk, which is linked to a single security or sector, but it does not protect against systemic risk. To manage this risk, the only truly effective tool is a long horizon: staying invested through crises usually allows you to benefit from the rebound that follows.

3. Interest rate risk

This risk mainly concerns bond SICAVs and, to a lesser extent, diversified funds. When market interest rates rise, the value of bonds already issued falls mechanically (and vice versa). The longer the portfolio’s duration, the higher this sensitivity.

A bond fund with a duration of 7 years will lose approximately 7% of its value if rates rise by 1%. That is what happened on a large scale between early 2022 and late 2023, when the ECB raised its key rates from 0% to 4%: many bond funds, including some considered “safe,” posted unusual negative annual returns.

4. Credit risk

Credit risk is the risk that a bond issuer, whether a government or a company, fails to repay its debt or pay its coupons. This risk is close to zero for government bonds from the highest-rated countries (Germany, France, the United States), but significant for high-yield corporate bonds or the debt of fragile emerging countries.

Rating agencies (Standard & Poor’s, Moody’s, Fitch) assess this risk and publish ratings ranging from AAA (almost no risk) to D (default). A fund holding well-rated bonds (investment grade) is much less exposed to credit risk than a high-yield fund. If an issuer is downgraded, its bonds lose value, affecting the fund’s NAV.

5. Liquidity risk

Liquidity risk has two dimensions. The first concerns the assets in the portfolio: in periods of stress, some securities can become difficult to sell quickly without taking a significant discount, forcing the management company to sell them at unfavorable prices. This risk is more present in funds invested in illiquid corporate bonds, small caps, or alternative assets.

The second dimension concerns the investor: in exceptional circumstances, a SICAV may temporarily suspend redemptions to protect remaining investors. This legal and regulated mechanism can prevent an investor from getting their money back when they need it.

For traditional SICAVs invested in listed and liquid assets (large-cap equities, government bonds), this risk remains very low under normal market conditions. It deserves more attention in funds investing in less liquid assets.

6. Currency risk

When a SICAV invests in assets denominated in a foreign currency (U.S. stocks in dollars, emerging-market bonds in local currencies), fluctuations in that currency against the euro affect the fund’s performance for the European investor. An appreciation of the euro against the dollar, for example, mechanically reduces the euro return of an unhedged U.S. equity fund.

Some funds systematically hedge this currency risk using financial instruments (forward contracts, currency swaps). This hedge has a cost, visible in ongoing charges. Other funds leave currency exposure open, which can work either way depending on exchange-rate movements.

7. Management risk

In an actively managed fund, the manager makes investment decisions that may turn out to be wrong. They may overweight a sector that underperforms, pick securities that fall, or misread a market turning point. This risk is specific to each manager and difficult to assess in advance.

That is one reason why past performance over a long period (5 to 10 years) and the consistency of that performance relative to the benchmark are useful indicators when selecting an active fund. A manager who regularly beats their index over 10 years has proven the quality of their management more convincingly than a manager whose performance is strong over 1 or 2 years.

Behavioral risks: often more costly than market risks

Behavioral finance has documented a paradoxical phenomenon well: retail investors, on average, achieve lower returns than the funds they invest in. Why? They buy when markets are high, after a rise that attracts attention, and sell when they are low, under the effect of fear.

Selling in panic

This is the most common and most costly mistake. During a sharp market decline, the temptation to “stop the losses” by selling is powerful. But selling at the bottom locks in the loss and deprives the investor of the rebound that almost always follows. In March 2020, during the Covid crash, global equity markets lost 30% to 35% in a few weeks before rebounding to record levels in less than a year. The investor who sold at the bottom took the full loss without benefiting from the recovery.

Chasing recent performance

Buying the fund that performed best the previous year is one of the least effective strategies statistically. Studies regularly show that funds at the top of the rankings one year are rarely the ones that outperform the next. Yet this is the most common behavior among retail investors, encouraged by performance rankings published at year-end.

Underestimating the horizon needed

Investing in an equity SICAV when you need the money in 2 years means taking timing risk: if markets fall when redemption is planned, the investor is forced to sell at a loss. Matching the fund’s risk profile with the investor’s actual horizon is the first line of defense against this type of risk. That is also why the question “How long can I stay invested?” is the first one to ask before investing.

How can you limit the risks of a SICAV?

Match the fund profile to your actual horizon

The fit between the SICAV category chosen and the investment horizon is the most important and most underestimated risk-management factor. A money market SICAV for short-term savings, a bond SICAV for a 3- to 5-year horizon, an equity SICAV or a dynamic diversified SICAV for a horizon of at least 8 to 10 years: this basic consistency avoids the vast majority of unpleasant surprises.

Diversify across categories and managers

Putting all your savings into a single fund, even a well-rated one, concentrates management risk. Spreading your money across several funds from complementary categories (equities and bonds, for example) reduces dependence on a single manager or a single asset class. You do not need to hold 20 different funds: 2 to 5 well-chosen funds already provide solid diversification.

Invest gradually

Gradual investing, meaning regular contributions rather than a single lump sum, reduces the risk of poor timing: you buy at different points in the market cycle, which mechanically smooths your average purchase price. This approach is particularly useful for equity SICAVs, whose net asset value can vary sharply from one month to the next.

Read the KID carefully before subscribing

The PRIIPs KID (Key Information Document) presents the risk indicator, performance scenarios under different market conditions, and the fund’s main specific risks. Reading it carefully before subscribing helps you identify the risks the fund may face in an unfavorable setup and check whether those scenarios fit your own situation.

Complete guide to investing in a SICAV.

What AMF approval means, and what it does not mean

Approval granted by the Autorité des marchés financiers (AMF) is sometimes wrongly interpreted as a guarantee of a product’s strength or performance. In reality, it mainly confirms compliance with a regulatory framework and certain operating requirements, without constituting a “guarantee” in the financial sense of the term.

What approval covers

Approval confirms that the management company and/or the fund meets regulatory requirements, particularly in terms of organization, procedures, and compliance arrangements. It also implies the existence of an operating and control framework that complies with the applicable rules, for example through the involvement of actors and mechanisms provided for by regulation (such as a depositary and, where applicable, external controls). Finally, it requires the availability of regulatory documentation (prospectus, KID, where applicable) that meets formal and content requirements.

What approval does not cover

Approval is not an assessment of whether investing is appropriate, nor a judgment on the quality of the investment strategy. It does not predict the fund’s future performance, the absence of losses, or capital preservation. A fund that complies with the applicable rules can therefore record a significant drop in value if markets move unfavorably, if certain risks materialize (real estate, credit, liquidity, etc.), or if investment choices turn out to be less favorable.

Checklist: assess a SICAV’s risks before subscribing

• I have read the synthetic risk indicator (1 to 7) in the KID and understand what it measures and what it does not measure.
• My actual investment horizon is longer than the fund’s recommended horizon and compatible with its historical volatility.
• I have identified the fund’s main risk: market, rate, credit, or currency, depending on the category.
• I have checked the adverse performance scenarios in the KID and am prepared to accept those potential losses.
• I am investing only money not needed in the short term: no planned expenses within the fund’s horizon.
• I have a plan if markets fall: I know in advance that I will not sell in panic and that I will keep my investment.