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Socially Responsible Mutual Funds: Merely Hype?

Updated on August 7, 2010

Some are making attempts to break away from the pack in search of a more holistic approach to investing. While traditional investors are only interested in the bottom-line, the green movement is pushing people to raise their awareness about environmental factors and the influence is spilling over to the corporate world. Individuals may have a specific cause or principal that drives them, whether it is religion, politics or human rights.

This article takes a critical look at the idea of socially responsible mutual funds. Arguments are raised not because supporting ethics and principals isn’t admirable, the problem lies in the fact it is unrealistic when applied to mutual fund investing. It adds a layer of complexity to the investing process that will do little more than paralyze the investor and perhaps even introduce guilt when companies once thought to be ethical turn out to act diabolically behind the curtain. In the end, it may be little more than a marketing ploy.

The Manager is in Control, Not You

Actively managed mutual funds are made up of a long list of stocks, bonds, short-term money instruments (such as loans), other funds and commodities such as natural resources and precious metals.

Stock pickers need to learn about a company in depth and understand the business before investing in it. This is the key to success talked about in great lengths by investing giants like Warren Buffet. Fund investors however don’t have the same luxury. It is unrealistic for the fund investor to look into each stocks contained in a fund and learn about each business in detail, attempting to measure how ethical the businesses practices are.

Ultimately, you are placing complete trust in the manager of the fund. He or she as a matter of course, completely changes the contents of the fund over time. So if even if you were pleased with the fund when you purchased it, there is no telling what it will become in the future.

Green funds may just limit your options.
Green funds may just limit your options.

Mutual Funds are Too General to Get Picky

Funds fall into very general categories like Bonds, Small Cap, International, U.S. Equity and Emerging Markets. Do any of these examples strike you as more ethical than any others? Beyond supporting your local economy or Government via bonds, there isn’t a way to support every specific niche cause via a mutual fund.

Excluding entire industries you don’t wish to support is far more realistic than supporting individual ethical companies. If you are an environmental activist, for example, you can avoid funds based on natural resources (such as oil and fossil fuels).

Green funds supporting alternative energy sources like Spectra Green and Guinness Atkinson Alternative Energy may have a place in your portfolio. However it’s advised not to get too carried away by the hype and to keep green investments balanced with traditional funds.

Companies Have 100% Accountability for Their Own Actions

Every company wants to appear to be socially responsible. Unfortunately it’s often more of a marketing gimmick designed to impress consumers and shareholders than a rigidly followed philosophy. Therefore the press releases, new articles and any other information you read about a corporation’s social awareness is bound to be biased and can’t be considered to be an accurate representation of realistic, day-to-day operations.

Acting responsibly is the onus of the company itself, not a mutual fund investor. A corporation is in the business of making money and should not be confused with a charitable organization. Don’t count on a company to accurately embody your ideals. If a certain cause excites you, get involved with local groups, non-profit organizations or philanthropy. Most mutual funds are too diverse to move according to a moral compass.

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      Ron Robins 7 years ago

      You make a good case as to why socially responsible investors should build their own stock portfolio to mirror their values. This is not a formidable undertaking either.

      I advocate, teach and write on the subject of socially responsible investing -- and have a popular website that has unique information which might interest readers on this subject. It includes the latest global green and SRI news and research. My site is at http://investingforthesoul.com/

      Best wishes, Ron Robins