What are socially responsible mutual funds?

Socially responsible mutual funds hold securities in companies that adhere to social, moral, religious or environmental beliefs. To ensure the stocks chosen have values that coincide with the fund's beliefs, companies undergo a careful screening process. A socially responsible mutual fund will only hold securities in companies that adhere to high standards of good corporate citizenship.

Because people hold such a wide variety values and beliefs, fund managers have quite a challenge in determining the stocks that reflect the optimal combination of values for attracting investors. The specific criteria used when screening for stocks all depend on the values and goals of the fund. For example, funds with a strong sensitivity toward issues of environmental concern will specifically pick stocks in companies that go beyond fulfilling minimal environmental requirements.

Many socially responsible mutual funds will also partition a portion of their portfolios for community investments. A common misconception is that these investments are donations. This is not the case. These investments allow investors to give to a community in need while making a return on their investment. Many community investments are put toward community development banks in developing countries or in lower-income areas in North America for affordable housing and venture capital.

Source: Investopedia

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