Socially Responsible Mutual Funds and Investing

Socially responsible mutual funds are a popular tool for what is known as socially responsible investing (SRI). While some might look down on it as extreme or unlikely to generate good returns, it is actually a way to make one’s portfolio grow. In fact, SRI offers a way for investors to truly put their hearts into investing their money and increasing their net worth.

While socially responsible mutual funds are new, SRI is not. Its tradition goes back hundreds of years with religious and other groups that used it to oppose slavery and what they saw as vices. Over time, this has evolved into different financial instruments. These enable people who feel strongly about certain causes to make statements and hopefully encourage courses of action they support.

Reasons for socially responsible investing

While SRI is sometimes carried out by those not particularly concerned about its financial implications, most of those following SRI strategies are people who have every intention of earning a good return while trying to encourage changes in the world at the same time. By funneling money to businesses that see as acting the most responsibly, SRI can cause a change while giving those who do it a feeling of satisfaction as they make money.

Returns costs of socially responsible mutual funds

Although many people automatically assume that returns from SRI are lower, studies have shown that this is not the case. On average, they do just a well mutual funds that do not have SRI as a goal. Some may find this surprising, but it is not so unexpected for those who stop and think about it. Companies that act responsibly will likely have lower incidences of lawsuits, consumer boycotts and other problems.

The major downside is costs. Mutual funds that strive for socially responsible investing need to do more research. This increases their operating expenses and therefore the costs they must pass on to investors. Keep in mind that even no-load funds have operating expenses that investors must bear in the end.

There is also the problem of deciding on what exactly constitutes SRI. Although there is wide agreement practices such as child labor are wrong, things are not so black and white in other areas of concern. Therefore, everyone interested in SRI must decide on what is important to them and be very careful when making investment decisions.

Criteria many social investors look for

Socially Responsible Mutual Funds

Every investor has different concerns, but most social investors are interested in one or more of the following categories of SRI:

  • Human rights: Some people are concerned with how companies pay their employees and the working conditions they are subject to or if the goods are produced by child labor. In other cases, there is a concern with how companies working in remote areas, such as those involved in mining and energy production, impact indigenous people who may be living there.
  • Environmental concerns: Those interested in SRI often look for companies that practice sustainable development. This includes firms that promote green technologies, energy conservation and recycling.
  • Product safety and health: SRI tends to avoid companies that produce tobacco, alcohol or other products that can be harmful to human health.
  • War and religion: Pacifist investors avoid those companies involved in military related activities. There are also funds that shun companies supporting products or activities which certain religious groups consider immoral.
  • Corporate government and social justice: While companies that investors feel are involved in discriminatory and other unethical behavior are avoided, resources are directed into those that are investing in needy communities or doing other things investors want to encourage.

Additional methods of SRI

Socially responsible mutual funds are not the only option for SRI. With their lower costs, electronically traded funds are a more efficient way of investing more money. Those considering going this route should consider the merits of ETFs vs. mutual funds.

Stocks and bonds
Those using either mutual funds or ETFs will always be relying on others to make their decisions of what type SRI they will be involved in. For a more personalized approach that can potentially work much closer to home, it is possible for people to simply invest directly in stocks and bonds of those institutions that most closely match their values.

Shareholder activism

Holding shares in a company gives investors a piece of that business and some influence on the decision making process. Those participating in SRI sometimes use this power to influence the policies of companies.

Some of the largest socially responsible mutual funds include PIMCO Total Return III Institutional and Pax World Balanced Fund. With so many differences of opinion and values, most doing SRI need to do careful research and consider all options if they want to earn a good return while supporting causes they believe in.

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