Mutual funds have two major drawbacks.  The first is that mutual funds are a one-size-fits-all investment.  Once you've committed to a specific fund, you have no control over the investment portfolio.  You may have limited knowledge of holdings, investment tactics, risk level and recognition of taxable gains.  The second drawback is that socially responsible mutual funds force you to accept the ethical principles as set by the fund.  The mutual fund's manager decides which companies to invest in and which to reject.

     There is no free lunch with socially responsible investing.  Depending upon the skill of the manager, you should expect to do as well as and, hopefully, a little better than the broad market.  However, seeking a fund manager who has the potential to deliver positive absolute returns on a consistent basis is also critical.  After all, what is the point of keeping pace with the market even when it goes down?

     Consider dividing your portfolio between either a stock fund (or two or three) and a bond fund or simply buy it all together with a "balanced" fund (that includes stocks and bonds).  Remember, the trick behind investing is also about knowing how much to allocate to each asset type.

     Socially responsible bond funds tend to be heavy on federal agency bonds (mortgage securities) and may avoid U.S. Treasury securities.  Yet because of an inability to differentiate further their portfolios from plain vanilla bond funds, socially responsible bond funds have yet to attract substantial assets.  Examine the fund's holdings, particularly the corporate bonds, to see if you would be comfortable owning them.

     Consider the social screens on socially responsible funds, i.e. the types of companies they will or will not invest in, and see if you can find one that agrees with you.  More information is available on their web sites and all would be more than happy to send you a packet of materials.

     For funds that practice shareholder activism (i.e. advocacy exerted via shareholder resolutions and proxy voting), you should invest in one of several mutual funds that do more than screen their investments.  Some of these funds may also allocate a percentage to community investments.

     As you may have already concluded, only a few of the many socially responsible funds available in the marketplace may contain the package of characteristics that you are looking for.

     Mutual funds are not for everyone.  After more than two decades of rapid expansion, mutual funds have revolutionized investing for the small investor.  Mutual funds may be right for you if:

1. You have a smaller account that could not otherwise become broadly diversified in a cost-effective manner,
2. Your ethical principles agree with those of the fund's managers, and you have no need to go further,
3. You prefer not to hold stocks and bonds directly, or
4. You do not require the personal attention of a full service investment provider (i.e. a professional who can provide portfolio management advice with regard to return objectives, risk levels, security selection, taxes and other issues relating to your portfolio).

     Examine the full package that any investment provider can offer you, including the complete list of fees and expenses.  Remember, you deserve and should expect excellent service.  Find someone who just doesn't see you as a dollar sign.

     There are many good mutual funds, investment advisers, financial planners and brokers and unfortunately at least as many who are less than satisfactory, or worse.  With so many choices available, you deserve to be comfortable working with whomever you decide upon.

     To assist in developing and maintaining a socially responsible investment portfolio, you are invited to subscribe to The Derailleur newsletter.  Articles feature commentary on socially responsible investing and analysis of opportunities in the investment markets as well as our Select List of socially responsible mutual funds.  When several are held as a portfolio, these select mutual funds offer a diversified strategy of responsible investing, with historically strong performance as well as fees and expenses that are at or below average.

     A subscription to The Derailleur may well save you many times more in mutual fund fees and expenses than the cost of the newsletter, and provide information on issues of concern for you as an environmentally and socially responsible investor.