Furthermore, the performance of socially responsible funds can be tracked and measured against other funds with similar objectives. Socially responsible funds even have their own index — the Domini Social 400 Index. While this index is not managed, and you can't invest directly in it, you will find it a useful tool should you decide to invest in socially responsible funds.
Yet, despite these factors, there is at least one potential drawback to investing in socially responsible mutual funds: lack of diversification. The problem isn't so much that an individual socially responsible fund may not be properly diversified, although that could happen, given the necessity to screen out entire industries.
The bigger issue is that the universe of socially responsible funds is much smaller than that of other funds, and socially responsible funds, by definition, resemble each other to a certain extent. Consequently, you may have a hard time achieving a diversified portfolio of socially responsible funds across different asset classes — small, mid-size and large companies, "value" stocks, international stocks, etc. — that is so important when investing.
Of course, diversification, by itself, cannot guarantee a profit or protect against a loss. However, the more asset classes you can diversify into, the better opportunity you have to help reduce the effects of volatility on your portfolio. This helps explain why socially responsible portfolios tend to have more volatile returns and are more susceptible to sharp downturns during bear markets than non-socially responsible mutual funds.
Before you invest in a socially conscious fund, or any mutual fund, for that matter, be sure to read the prospectus carefully, because it describes the fund's investment objective, risks, charges and expenses. In the investment world, knowledge is power.
Ultimately, in evaluating socially responsible funds, you will have to decide just how much your sense of social responsibility will affect your investment choices. So take your time, evaluate all the factors involved, consider the alternatives— and make the decisions that are right for you.
Mollye Raney, an Edward Jones investment representative, may be reached by calling 744-7190. This is a paid advertisement.