Socially Responsible Mutual Funds

Socially responsible mutual funds hold securities in companies that adhere to certain social, moral, religious, or environmental beliefs.
Socially Responsible Mutual Funds
3 min
18-June-2024

Socially responsible mutual funds are a type of mutual fund that aims to generate investment returns through investing in securities that focus on creating a positive social impact.

If you are looking to promote such companies, this article will help you understand what is a socially responsible mutual fund, along with other important factors.

What is Socially Responsible Investing (SRI)?

Socially responsible investing is an investment strategy in which investors analyse a company’s corporate behaviour as a crucial metric to predict its security’s future price direction. SRI investors combine a company’s social, environmental, and governance criteria with extensive investment standards to ensure that the security is worth investing in and will give good returns.

What are socially responsible mutual funds?

Socially responsible mutual funds definition refers to investment instruments that pool funds from various investors to invest in multiple stocks and bonds of companies that meet specific social, environmental, and governance criteria.

Importance of SRMF in modern investing

More investors are investing in socially responsible mutual funds as there has been increased awareness about social topics such as climate change, pay equality, positive work culture, corporate governance, etc. Investing in socially responsible mutual funds is important as it gives investors a way to invest in companies that are committed to making a positive social impact while earning profits on the investments.

History of socially responsible mutual funds

Here is everything you need to know about the history of SRI and socially responsible mutual funds:

  • The origins of socially responsible investing
    The origins can be traced back to the 18th and 19th centuries when Methodists and Quakers restricted investments in businesses having operations in gambling, alcohol, and slavery in the United States and United Kingdom. Modern SRI started in the 1960s with the civil rights movement and anti-war calls in the United States.
  • The development of mutual funds
    Mutual funds started operating in the 20th century when investors pooled their money to invest strategically in diversified and professionally managed investment instruments.
  • The emergence of SRMFs
    The first SRMF, the Pax World Fund, was launched in 1971 as a direct response to the Vietnam War. The fund aimed to invest in companies that do not manufacture or supply weapons.

Key principles of SRMF

  • Environmental, Social, and Governance (ESG) criteria
    SRMFs are known to consider the ESG criteria to identify companies with positive social impact. The main aim of SRMFs is to offer investment exposure to companies that focus on environmental and social impacts, such as carbon footprint, human rights, waste management, etc.
  • Positive and negative screening
    Socially responsible mutual funds identify investment opportunities through positive and negative screening. Positive screening screens companies based on their high ESG performance. Negative screening is used to avoid investments in companies with low ESG performance and operations in socially irresponsible industries such as weapons, tobacco, fossil fuels, etc.
  • Impact investing
    Impact investing generates financial returns by investing in companies that create measurable social and environmental outcomes. SRMFs aim to invest in such companies and generate good mutual fund returns for the investors.
  • Community investing
    Socially responsible mutual funds engage in community investing to support underserved communities by investing in local job creation and economic development. SRMFs may invest a portion of pooled funds in microfinance organisations or local companies trying to create a positive social impact.

Benefits of investing in SRMF

Here are the benefits of investing in socially responsible mutual funds:

  • Aligning personal values with investment decisions: SRMFs allow investors to choose mutual funds that relate to—or align with—their personal values of social impact.
  • Promoting sustainable and ethical business practices: SRMFs ensure that companies that have sustainable and ethical business practices get funds to continue creating positive social change.
  • Diversification and risk management: SRMFs provide effective diversification, as risk is spread across various companies that meet the ESG criteria, allowing for better risk management.
  • Potential for competitive returns: SRMFs choose companies with good ESG performance. Such companies have better return potential with lower volatility risk.

Types of socially responsible mutual funds

The different types of SRMFs include:

  • ESG-themed funds
    ESG-themed funds are those that focus on sectors with long-term growth potential, such as resource management and renewable energy. As these sectors continue to evolve and expand, those who invest in them can position themselves for capital appreciation. Read more about, What are ESG mutual funds.
  • Sustainable sector funds
    Sustainable sector funds, also called green funds or responsible investment funds, are funds that prioritise environmental, social, and governance (ESG) factors besides financial performance. Read more about, What are sectoral mutual funds.
  • Faith-based funds
    Investors investing in faith-based funds wish to generate returns by selecting investments that align with their religious beliefs and values. Thus, they avoid companies they feel do not fall in line with their religious beliefs.
  • Green bonds and fixed-income funds
    Green bonds, as the name suggests, are fixed-income instruments that primarily fund projects with a positive environmental impact (green projects). These are similar to traditional bonds as they generate returns for investors and utilise the proceeds to finance sustainable projects.

How to choose socially responsible mutual funds?

  • Assessing your risk tolerance and investment objectives
    Assess how much risk you can comfortably take while determining why you want to invest to set your investment goals.
  • Understanding fund performance and fee
    Analyse the fund’s prospectus to understand how the fund has performed (historical returns) and all the fees involved.
  • Analysing ESG scores and ratings
    Analyse the fund’s ESG score and ratings provided by third-party rating agencies.
  • Reviewing fund holdings and management team
    Review the fund holdings for financial perspective and management team for investment expertise.
  • Comparing funds using online tools and resources
    Use online tools such as mutual fund calculators like SIP calculator, lumpsum calculator, step-up calculator, and other resources for SRMF comparison.
  • Role of SRMFs in a diversified portfolio
    SRMFs enable investors to support ethical and sustainable business practices while potentially achieving competitive returns. You can diversify your portfolio using SRMFs to mitigate risk and ensure a positive social impact.

Challenges of socially responsible mutual funds

Some challenges of SRMFs include exaggerated ESG scores, performance concerns, higher fees, data quality, market volatility, and regulatory risks. It is crucial to conduct thorough due diligence before investing.

Future of SRMF and responsible investing

The future of SRMF and responsible investing depends on further technological advancements based on factors such as AI. Furthermore, increased investments will help drive better social change and create a positive impact.

Conclusion

Social investing, when done through mutual funds, requires investing in socially responsible mutual funds. These funds provide exposure to companies with an increased focus on ESG criteria. The investment promotes positive social change while earning returns for the investors.

If you are looking to invest in mutual fund schemes, you can visit the Bajaj Finserv Mutual Fund Platform. This platform allows you to compare mutual funds through unique tools such as the SIP calculator, helping you achieve your investment goals.

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Frequently asked questions

What is a Socially Responsible Mutual Fund (SRMF)?
SRMFs are types of mutual funds that invest in socially responsible companies to generate returns.
What are the best performing socially responsible mutual funds?
There are numerous best-performing SRMFs in India. However, it is important you analyse them based on your investment goals and after analysing the fund’s prospectus.
What are the benefits of socially responsible investing?
The benefits of investing in SRMFs include promoting positive social change, aligning financial goals with ethical values, and supporting sustainable practices.
What is the difference between socially responsible investing and ESG?
SRI selects investments based on ethical criteria, while ESG investing evaluates companies based on their ESG score.
What are the negatives of socially responsible investing?
The negatives of investing in SRMFs include companies misrepresenting their ESG scores, potential underperformance, and higher fees.
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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.