What is a "socially responsible" mutual fund?

By Investopedia Staff AAA
A:

As the name suggests, socially responsible mutual funds invest exclusively in socially responsible investments. Securities from companies that adhere to social, moral, religious and/or environmental beliefs are a few examples.

In addition to basic quantitative analysis, a socially responsible portfolio manager takes into account a company's community investment, environmental responsibility, protection of human rights, employment diversity, animal testing and product offering. Companies that produce weapons, gambling facilities, alcohol and tobacco are also often excluded. Because individuals have varying values, beliefs and investment goals, there are a number of different types of socially responsible mutual funds available. Some might include only equities or bonds, while others might hold a combination of the two. Furthermore, some funds might specialize in being free of securities from alcohol, casino and tobacco companies, while others might invest exclusively in companies that are environmentally responsible.

Securities that have been screened for socially responsible criteria are then combined to achieve a specific investing style and goal. A portfolio manager will decide whether the fund will be made up of:

  • equity, fixed income or both (balanced)
  • domestic or international securities
  • small, mid, or large cap stocks

How does the performance of socially responsible mutual funds measure up to that of a regular portfolio? On average, their performance has been comparable to that of regular mutual funds. According to KLD Indexes, the Domini 400 Social Index YTD return as of September 30, 2007 was 7.19%, compared to the S&P 500 return of 9.13%.

To learn more about this subject, see Socially Responsible Mutual Funds, Go Green With Socially Responsible Investing and Change The World One Investment At A Time.

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