Summary
This assignment is a discussion on the topic of socially responsible mutual funds. The discussion will look at the advantages and disadvantages of socially responsible mutual funds over conventional mutual funds. It starts with a general overview of what is a socially responsible mutual fund. This will entail two key aspects namely corporate citizenship and social business and how they relate to socially responsible mutual funds. It will then look at the advantages and disadvantages of socially responsible mutual funds over conventional mutual funds.
Discussion
According to Investopedia, a mutual fund is ‘An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets’ (Investopedia, 2009). The funds are managed by what is referred to as fund managers who invest the fund’s capital to generate income and capital gains for the investors (Investopedia, 2009).
The Investopedia goes on to describe a socially responsible mutual fund as one that holds securities in firms that observe and adhere to moral, religious, social and environmental beliefs or ethics. The funds also hold securities in firms that demonstrate high standards of corporate citizenship or Corporate Social Responsibility
The concept of corporate citizenship is generally used to refer to the relationship between businesses and their environment. All businesses operate in social, political, economic, and natural environments. The concept, therefore, takes into account how businesses interact with these environments, either positively or negatively. The topic of corporate social responsibility can be broken down into four main components namely the ethical, economic, philanthropic and legal components (Aras & Crowther, 2010).
The ethical component of corporate social responsibility comprises the requirements or expectations of any business by society. Such requirements or expectations include things like doing what is just, fair and right, using the law as the basis of organizational behavior, avoidance of questionable practices and doing business in a manner that is above the minimal requirements (Aras & Crowther, 2010).
The economic component comprises taking care of the interests of the shareholders, investors and customers, profit-making and maximization, the minimization of the costs in undertaking the business and the formulation and implementation of strategic policies which propel the business forward (Aras & Crowther, 2010).
The legal component comprises the respect and compliance of the business to laws such as environmental laws, consumer laws, laws that protect the employees, as well as the respect of contractual and warrants agreements between a business and its clients or employees (Aras & Crowther, 2010).
Finally, the philanthropic component entails basically giving back to society by the business. Businesses may do this in a variety of ways like establishing or supporting programs that directly benefit the society like health, education, and cohesion programs as well as programs that boost harmonious living of people of diverse backgrounds (Aras & Crowther, 2010).
Socially responsible mutual funds also keep aside a portion of their portfolios for investment in the community, which allows the investors to serve needy communities while still making some returns. This is what is called social business. A social business is a business that operates under the principle of the non-loss, non-dividend basis for the shareholders or business owners with an aim of achieving a certain social objective. The social business may be owned by governments, charity organizations or individual owners (Yunus & Weber, 2007, p.24).
The main objective of a social business is to alleviate poverty through empowering people, especially the less fortunate and the poor with financial resources to do business or through programs that provide them with employment or access to cheaper and affordable goods and services. The shareholders or owners of social business do not get any dividends from the profits made by the business but only their initial contributions to the social business (Yunus & Weber, 2007, p.24).
Social business was initially formed with the main objective of helping the poor through financial and educational empowerment programs and environmental protection. Since its inception, it has broadened its scope with the objective of making it a multidisciplinary strategy for poverty alleviation and development. According to Baker in his journal titled “Social Business-Aims and Scope”, social business goes beyond economic empowerment as envisioned by its founder Professor Yunus to include corporate social responsibility, entrepreneurship, globalization, social and technological innovation, transformational marketing, sustainability, wellbeing, volunteerism, and foreign aid (Baker, 2011).
The scope of social business as discussed by Baker, therefore, portrays it as a multidisciplinary approach to poverty alleviation in that it brings on board various disciplines and players together to pool up resources and efforts in order to help the poor through doing business in a sustainable manner. The multidisciplinary approach, therefore, makes social business all around and increases its ability to fight, eradicate poverty and initiate development (Yunus, 2007).
Social business if done properly has got a big potential of alleviating poverty and initiating development. As per the scope discussed above, social business encompasses various players who bring together their financial, technological and technical inputs in combined efforts which not only help in poverty eradication but also in improving the living standards of the poor.
Advantages of socially responsible mutual funds over convectional mutual funds
The funds have the advantage of that they have excellent management systems. This is achieved through the ownership rights of the socially responsible investors to influence the management of the funds through policy formulation and change. This ensures that investors and shareholders are guaranteed the security of their funds and investments (Investopedia, 2009).
The socially responsible mutual funds have strict policies on enhancing and managing transparency by ensuring that they disclose the voting proxy policies and procedures to their shareholders. This boosts the confidence of shareholders which in turn enhances their investment volumes. The rule of disclosing voting proxy policies is anchored in the Securities and Exchange Commission’s act of 2003, which stipulates that all mutual funds companies must make it public knowledge the proxy voting policies and procures so that all the shareholders may benefit from such information (Investopedia, 2009).
Unlike conventional funds, socially responsible mutual funds enable small investors to have the opportunity to access funds, portfolios, securities and bonds which are professionally managed. In socially responsible mutual funds, each shareholder participates in a proportional manner both in the losses and gains of the funds. The mutual fund’s shares or units are possible to be redeemed or purchased as per what is referred to as net asset value per share (Investopedia, 2009).
Socially responsible mutual funds also have the advantage of making the investors and shareholders do business and pursue their moral, religious and environmental values at the same time. The fact that a person is an investor does not stop him or her from becoming a social, moral or religious being and consequently, socially responsible mutual funds provide investors with a business opportunity and environment which serves their financial, social, moral and religious interests.
Even though the funds may have higher fees than many conventional mutual funds, the investors and shareholders do not perceive the extra fees as a threat to their profits or returns but rather as genuine and valid costs/ fees because it goes a long way in stabilizing their psych thus making them to really enjoy the products of the investments.
Disadvantages of socially responsible mutual funds over convectional mutual funds
Due to the ethical research undertaken by mutual funds managers, socially responsible mutual funds usually have higher fees than conventional mutual funds. Similarly, since the funds are managed by small companies and since the assets under management are relatively small, it becomes difficult for the socially responsible investors’ funds to use what is referred to as economies of scale which can be used by the convectional funds (Richardson, 2008).
Due to the strict policy on transparency, administration and management in the socially responsible mutual funds, some investors in or from countries that are known for money laundering, drug trafficking and gambling may find it hard to access the funds, even if they are not involved or do not involve themselves in such illegal or sinful business practices. This amounts to discrimination. Some companies may also be denied the funds on discriminatory grounds or on political grounds, or simply put, some ill-intended people may label some companies as bad practitioners as far as corporate citizenship is concerned, which amounts to the politicization of the socially responsible mutual funds (Richardson, 2008).
References
Aras, G & Crowther, D. (2010). A handbook of corporate governance and social responsibility Corporate social responsibility series. Farnham GU9 7PT: Gower Publishing, Ltd.
Baker, M.J.(2011). Aims & Scope. Web.
Investopedia. (2009). Socially Responsible Mutual Funds. Web.
Richardson, B. J.(2008). Socially responsible investment law: regulating the unseen polluters. Oxford: Oxford University Press.
Yunus, M., & Weber, K.(2007). Creating a World without Poverty: Social Business and the Future of Capitalism. Greater London W6 7JP: Public Affairs Publishers. p.24.
Yunus, M.(2007).Yunus Business Center: Social Business. Web.