How To Research A Socially Responsible Fund

June 3, 2014
by Michelle Perry Higgins

Start Shopping for Long-Term-Care Insurance at 45One piece of advice I would give people interested in socially responsible funds is not to forget to do the research normally involved in choosing traditional mutual funds.

There are a number of socially responsible fund families, as well as socially responsible funds within traditional mutual-fund families, and you need to be cognizant of things like expense ratio, manager tenure and the other numerous criteria that you would normally apply to choosing funds. That being said, there are a few considerations peculiar to investing in socially responsible funds.

  • You need to decide if you want some or all of your portfolio to be invested in socially responsible funds.  If you decide to use only socially responsible funds, it may be difficult to diversify to the same extent as you could with traditional funds.
  • Review the fund manager’s screening criteria and restrictions. Specifically, what kinds of companies does it exclude? Do the investing criteria align with the specific values that caused you to be interested in socially responsible investing in the first place?
  • Given that socially responsible funds may, based on their criteria, refuse to invest in significant portions of the market, you need to be prepared for time periods when the fund you choose may underperform traditional funds in the same sector or style box. For example, investing in a socially responsible large-cap fund that does not invest in fossil-fuel companies may result in relative underperformance if the conventional energy sector heats up.

Do your homework, understand what you are buying and consider how it may affect your portfolio in terms of diversification and returns.