A mutual fund pools money from various investments. Headed by a fund manager, the mutual fund often has a guiding philosophy or investment objective. Mutual funds are, relative to some other investments, easy for investors with cash constraints to take part in. Minimum initial investments for mutual funds are usually less than initial investment amounts for other investment opportunities.

A green mutual fund:

- Invests in companies that are environmentally responsible.
- Invests in companies that produce products that reduce the carbon footprint on the earth.

As the Green Initiative Grows, Green Mutual Funds Are Increasing

As more and more people become aware of global climate change, many people examine their lifestyles in an effort to live green – or live more lightly on the earth. Some companies are no exception. Innovative and visionary companies are attempting to carry out sustainability initiatives. Many companies are producing new products that help people live green – organic food brands, nontoxic cleaners and items for the home, and anything that maximizes resource conservation. You can read about the explosive growth of the green industry on the Forbes.com Web site.

With the rise in awareness of green initiatives, green mutual funds are also on the rise. In an era of volatile fuel prices and nightly news information on environmental issues and the future of the planet, green initiatives in manufacturing or investing seem much more mainstream.

Energy Issues: How They Apply to Green Investing

Energy is in the news. Not only do we need to find renewable sources of energy that do not contribute to global climate change, we also need to find sources of energy that lessen our dependence on foreign oil.

In light of resource conservation and the need to develop renewable resources, particular sectors within the green industry may offer future growth possibilities. These include:

- Solar cells: these convert sunlight into energy. They are compact and efficient, but still relatively expensive. 
- Wind turbines: efficient, costly, and expected to grow.
- Biofuels: alcohol- or vegetable-based fuels. These are inexpensive to make but require a lot of land to produce. 
- Fuel cells: convert hydrogen and oxygen into electricity. The process is clean and quiet, but the actual implementation is still far away. The technology is still in the research phase.

Visit Outside for a description of these sectors and their possible growth potential. Knowledge of these sectors can help you in your search for green mutual funds, if these areas appear to be good investment options for you.

 Pros of Green Mutual Funds

-         You get the diversity of a mutual fund, which may smooth out the volatility of markets, since your funds are invested across a variety of green stocks, bonds, or other assets.

-         You get the experience of a manager who chooses the investments and manages the fund. If you have neither the time nor the desire to individually manage investments, this is a good choice.

-         You can invest in line with your values. If supporting green companies matters to you, this is one way to cast a vote of confidence for the success of these companies.

-         As with all mutual funds, your money is somewhat diversified. Hypothetically, this lessens your risk and smoothes the bumps in volatile markets.

Cons of Green Mutual Funds

- Green initiatives and the green industry are relatively new in terms of corporate and industrial history. For that reason, green mutual funds invest heavily in companies that are often innovative and new. However, new companies have a higher risk of failing or posting volatile returns. 

- Expense ratios are often higher, compared to other mutual funds. The specialized nature of these funds drives the expense ratio up. 

- These funds may not have been in existence for as long as other mutual funds, so past performance indicators over the long term are not available yet. 

- Some green mutual funds have fewer holdings than conventional mutual funds. This makes volatility and risk more of a possibility, since there are less stocks or bonds in the fund pool to even out risk.

Additional Resources

- Social Funds Web site:   http://www.socialfunds.com/news/article.cgi/article2452.html 
- Outside Online Web site: http://outside.away.com/outside/culture/200611/green-investing-guide-3.html 
- Outside Online Web site: http://outside.away.com/outside/culture/200611/green-investing-guide-4.html 
- Morningstar Web site:      http://www.morningstar.com  
- Kiplinger.com Web site: http://www.kiplinger.com/columns/value/archive/2007/va1002.htm