The Basics of Ethical Funds
In recent years especially, the world of finance and the western business environment at large have undergone considerable change. In the wake of revealed irresponsibility and a deep, painful subsequent recession, consumers in general have grown more aware and concerned with the practices of businesses they buy products and services from. Additionally, the increased prominence of environmental considerations concerns a large percentage of people who keep the economy working. One significant response to this new sense of awareness is the rise of ethical funds as an investment vehicle.
Like more traditional mutual funds, ethical funds act as an intermediary through which to invest. In essence, individual investors pool their money, hand it over to those who run the fund, and let them make specific investments on their behalf. Mutual funds tend to spread risk, and grow a rate in accordance with the management style they’re under. An index fund, for instance, will generally see gains proportional to the index it’s based on. The distinction between a regular mutual fund and ethical funds, however, lies in priority.
Whereas the number one overall goal of a traditional fund is to maximize gains, ethical funds put the practices of the businesses they invest in ahead of all other considerations. The management personnel of an ethical fund will research the companies they are thinking about putting their investors’ money in to see if their core values and practices align with the social, moral, and ethical standards of that fund’s philosophy. These standards are quite diverse, and can vary from fund to fund.
Because social responsibility is typically the ethical investor’s number one priority, the guide to most appropriate ethical fund for you lies within your own philosophy. If, for instance, you have moral objections to investing in companies that garner most of their profits from the production of fossil fuels, it would be most appropriate to seek out an ethical fund that avoids investing in these companies as a matter of principle. There are ethical funds in existence for almost any major social philosophy. This includes important, well known issues such as environmental impact, discrimination, labor practices, and so on. As a result, the socially responsible investor will not have much trouble finding an ethical fund that aligns with their own view.
It should be noted that, though financial performance is secondary, it is important that ethical funds actually make money for their investors. An underperforming ethical fund will not only diminish one’s wealth, it will also fail to make the kind of social impact that a more successful ethical fund might. Therefore, an analysis of a given ethical fund’s past performance and current asset portfolio is necessary in the decision making process.