Many of us are aware that how we spend our money impacts the world. In fact, consumer choices have even been called voting with our dollars. Just as spending money shapes the world around us, so does how we invest money. Because many people invest their money in mutual funds or exchange-traded funds, it can take a bit of detective work to figure out how the money is invested. Here are some tips on investing with your conscience.
Socially Responsible Mutual Fund Considerations
Socially responsible mutual funds have filters that allow only certain companies or types of companies. For example, tobacco, firearms, gambling, alcohol, or pornography may be excluded. Today, one in four dollars under professional management in the U.S. is invested with socially responsible investment strategies, totaling more than $12 trillion. There are many different mutual funds out there, so let’s examine some of the important considerations.
Funds That Fit Your Values
Socially responsible mutual fund managers commonly filter out companies due to workplace practices, company values, employee diversity, environmental concerns, community support, governance issues, religious values, and human rights practices. Some limit fossil fuel and nuclear power companies while others do not. Start by determining which factors are most important to you when choosing a mutual fund.
Do socially responsible mutual funds have lower returns? This is a common misconception. Some investors believe that taking social and environmental concerns into account reduces investment risk. Harmful environmental and social practices are liabilities for companies that can create a huge financial burden. Funds that invest in only one or two sectors, however, may have lower returns than the S&P 500 and could have a greater risk because they are not as diverse.
Fundholders are charged an annual percentage of assets for the fees and expenses associated with operating a fund. It is basically the cost of owning a fund, and the fees go towards its management. The lower the percentage, the lower the fees. High fees can hinder returns and are an important consideration before choosing a socially responsible mutual fund. The expense ratio becomes even more important over time because of interest compounds.
Fund Diversity & Investment Goals
Thankfully, investing with a conscience doesn’t mean abandoning financial goals. Since socially responsible investing has been around for decades, there are many different funds to choose from with varying levels of risk, fund holdings, minimum purchases, and management practices.
Alternatives to Mutual Funds: Impact Investment Opportunities
Want to invest in making a difference? Impact investment opportunities allow investors to support positive projects and initiatives and are an alternative to purchasing mutual funds. Sample projects include preserving urban farmland, promoting renewable energy development, and expanding a natural food coop. The goals and returns of such programs vary widely, so research them carefully to determine if it is a good fit.
5 Great Socially Responsible Mutual Funds
Earth911 picked the following mutual funds, but these are just five out of many socially responsible funds available. Please review any funds carefully before you invest, and make sure they align with your values as well as your financial goals.
Parnassus Endeavor Investor (PARWX)
Parnassus Investments was founded in 1984 before most people were thinking about socially responsible investing. Founder Jerome Dodson believed that there is a lower investment risk when eliminating companies involved in alcohol, gambling, and tobacco and that are mindful of the environment and employees. This large company growth fund also eliminates fossil fuel companies and seeks companies with excellent working environments.
Parnassus Mid-Cap (PARMX)
This Parnassus fund invests in mid-sized firms and focuses on fast-growing companies. Parnassus Mid-Cap is less strict than the Endeavor Investor and does allow fossil-fuel companies. The portfolio consists of fewer than 40 stocks and has a below-average turnover.
This new exchange-traded fund was started in 2016 and consists of U.S. large-cap companies. The fund is a great way to invest in women-led businesses as the fund seeks firms with greater gender diversity in senior management and on boards. After fees, the fund performance generally follows the SSGA Gender Diversity Index.
The fund focuses on medium-security bonds, and since its inception in 2012, the fund has had a 2.59 percent return. 70 percent of the fund assets are demonstrating environmental, social, and governance (ESG) leadership. The remaining 30 percent of the fund is dedicated to social impact investing with a “measurable and positive impact” in affordable housing, community or economic development, and renewable energy and natural resources.
The index fund has alcohol, tobacco, and pornography screens and also eliminates companies involved in nuclear energy or that have major sales to the military. The fund also looks for companies that demonstrate diversity in the workplace and eliminates companies with human rights violations and major negative environmental impacts.
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