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What are Green Mutual Funds?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 16 January 2020
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Green mutual funds are mutual funds with an investment strategy which includes a commitment to the environment. The goal of such funds is to generate wealth for their shareholders while also contributing in a positive way to the environment, using a variety of investment techniques. A rise in interest in ecologically friendly practices in the early 21st century led to explosive growth in green mutual funds, and an accompanying caution for investors: not all mutual funds dressed in green clothing are actually green, and it pays to research with care.

Mutual funds are companies which use a pool of funds from their shareholders to make investments, sharing the profit and loss among the shareholders. The idea behind a mutual fund is that by working with a large pool of funds, the mutual fund can diversify its investments, maximizing the potential return and also decreasing the risk. Investors who do not have a lot of money to work with can use mutual funds to diversify their investments, while conservative big investors can put money in mutual funds and be assured of a return.

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In the 1990s, the concept of socially conscious investing began to attract attention. In socially conscious investing, people make a conscious choice to invest in companies which engage in socially responsible business practices that benefit the common good, and avoid investing in companies which are believed to be harmful. Green mutual funds are a branch of this type of investment, focused specifically on benefits to the environment.

A truly green mutual fund includes a discussion of ecologically friendly business practices in its prospectus, along with definitions for “green,” so that investors understand the types of companies the fund will invest in. Many invest in companies which are producing green technology, such as clean energy companies, recycling companies, and so forth. In addition, green mutual funds can invest in companies with environmentally responsible business practices, even if these companies do not specifically produce green products. The fund itself should also be run in an environmentally friendly way.

People invest in green mutual funds because they believe that it is important to take care of the environment. Returns on green mutual funds vary, and it is a good idea to research publicly available information before settling on a mutual fund to invest in. Reviews of mutual funds can be found in many financial publications, and some have specifically addressed green mutual funds, discussing the investment practices of major funds so that shareholders can get a clear idea of how green such funds really are.

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