Socially Responsible Mutual Funds Are Not Just Ethical But Also Profitable
Many people strongly feel about the issues plaguing the world today. This could range from environmental protection, abortion, to animal testing. Socially responsible investing is a way of investing wherein you can support the issues you strongly feel about, and not invest in companies that earn through unethical business or business practices. This could be companies having stakes in tobacco industry, alcohol industry, companies which engage in environmental pollution on a large scale in their manufacturing processes, companies that use animal testing, or child labor etc. if you feel strongly about such things, you would definitely not like to invest in such companies and encourage them. Investing in socially responsible mutual funds is a good way to play your part against such issues that you may strongly believe are important in your life.
Socially responsible mutual funds invest in companies that hold to social, moral, religious or environmental beliefs. The managers of such funds act like a shareholder activist, and may also take part in community investment. To make sure that the chosen stocks have values similar to those of the funds, such stocks undergo a screening process that would determine whether such stocks are eligible to be invested in line with the funds principles. However, due to different values and beliefs that different people have, fund managers can face a tough time deciding on the perfect mix of values that would attract most socially aware or socially responsible investors. In order to make the funds profitable, it is very difficult to focus on a single issue.
Many socially responsible mutual funds set aside some portion of their portfolio for community investment. Contrary to the popular belief that community investment is a charity, it is not. Such investments allow the investors to invest in communities that are in need, while making a return on such investment. These investments maybe put towards community development banks in poorer countries or backward neighborhood. This can provide funds for growth and development of such communities, like venture capital, or housing.
Many investors, who are more inclined towards personal profit may feel that such investments give lower returns, when compare to other funds, as such funds miss out on earnings of the "sins" industries like tobacco, gambling, liquor etc. However, this is not the case, and socially responsible funds have shown results that are comparable with other funds. As a matter of example, according to Domini Social Investments, the average 10-year return for the Domini 400 Social Index, as of December 2002, was 9.99%, compared to S&P 500's performance of 9.33%. However, being socially responsible turns out to be a bit costly. Socially responsible funds usually have higher fees than regular funds. Such increased fee is usually the result of additional ethical research that the fund managers have to undertake. Also, most of the socially responsible funds are run by smaller fund companies, which can result in increased administrative and management costs.
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