In the last few years, we’ve seen more people than ever before become interested in investing responsibly. Ethical funds are a part of this movement, but they can be confusing to understand if you’ve never come across them before.
Investing ethically means putting your money in things that align with your personal values and beliefs. For example, you might have an ethical stance against animal cruelty, which would rule out investing in firms that test their products on animals or sell meat from animals that has been tested on.
The phrase “ethical fund” can refer to any fund with a specific focus on ethical investments, or it can refer to funds that are approved by an independent organization as meeting certain standards of social responsibility.
In this article, we take a look at these types of investments so you can know how to choose an ethical fund.
What Is an Ethical Fund?
An ethical fund is a type of mutual fund that invests in line with certain social and environmental principles.
There are lots of ethical funds out there, each with its own specific focus, so you can choose one that serves your personal values and beliefs. For example, you might have an ethical stance against animal cruelty, which would rule out investing in firms that test their products on animals or sell meat from animals that has been tested on.
How To Choose an Ethical Fund – Things To Consider
Again, there are lots of ethical funds out there. So, you’ll want to make sure you pick the one that best meets your investment goals and your personal values.
You need to start by asking yourself
- What do my values and beliefs look like?
- What are my investment goals?
- Are there any specific ethical funds that align with my values and meet my goals?
Once you’ve decided on a fund, you’ll want to research it to make sure it meets your standards and is a fund you’re comfortable investing in. Make sure to read the fund’s prospectus. Ethical funds are required to have a prospectus, just like other mutual funds. It’s your responsibility to read this document and learn what’s inside it.
You can also look up the fund’s website to learn more about it, it’s management, practices, and what companies it invests in. Ethical funds are required to disclose their strategies so that investors know what they’re investing in. Ethical funds are also legally required to have a list of their top holdings, so you can see what they’re investing in.
Ethical funds can also be characterized by their degree of socially responsible investing (SRI). SRI funds go above and beyond typical ethical funds by limiting their exposure to certain investments while avoiding others altogether.
Pros of Investing in an Ethical Fund
Support Good Causes
Ethical funds invest in projects that support good causes and positive change. So, when you invest ethically, you’re putting your money into things that align with your personal values and beliefs.
For example, if you’re passionate about green energy, you could pick a fund that focuses on renewable power sources.
Invest Without Sacrificing Financial Returns
Ethical funds are required to produce the same financial returns as other funds. So, even though they’re investing in good causes, they’re not sacrificing your financial returns. Moreover, investing ethically means you’ll make a profit out of your investment while using your money for good.
Invest With a Community of Like-minded Investors
Ethical funds are open to all kinds of investors. You’ll be able to connect with a community of people who care about the same issues you care about. This will expose you to specific companies that meet your values, so you’ll have the opportunity to learn more about them.
Limits That Come With Investing in an Ethical Fund
For starters, ethical funds aren’t right for everyone. If you aren’t concerned about the issues they invest in or the companies they invest in, you may want to consider non-ethical funds.
Secondly, since ethical funds are investing in specific companies, they’re more difficult to research than non-ethical funds.
While ethical funds might be driven by the need to make a positive change, they are subject to the same risks as non-ethical funds. That means if you invest ethically but the companies falter or get into trouble, you may lose money.
Final Words: Should You Invest In An Ethical Fund?
Even in these tumultuous times, the stock market is still a good way to grow your money and invest for your future. The problem is that most standard index funds are riddled with unethical practices and companies that exploit their workers, pollute the environment, and wrack up unsustainable amounts of debt while paying their executives obscene salaries.
In response to these issues, the number of ethical or socially responsible investing (SRI) funds has been growing rapidly in recent years. In fact, according to a report by SEND6, an organization that promotes SRI policies and programs; there are now more than 3,000 different SRI mutual funds available in the United States alone.
However, this isn’t necessarily a bad thing. With the information highlighted above on how to choose an ethical fund, you can avoid negative investments while also encouraging you to see how important it is to support companies that uphold high standards across the board.