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Ethical funds: The new kid on the block

Aabhas Pandya

The fund industry is turning a new leaf with the launch of the first socially responsible fund from JM Asset Management Company, christened JM Heritage Fund. While the concept of a socially responsible fund was hitherto unknown to Indian investors, it is a popular investment vehicle in the US mutual fund market.

Ethical funds, as they are popularly called, cater to the need of a population segment with personal ethical codes, which are not in line with normal investment practices. These funds consider environmental, social and animal cruelty issues before investing in a company. Thus, the fund managers of JM Heritage Fund will follow a process of elimination while taking investment decisions and will not invest in companies that are engaged in running abattoirs, meat processing and packaging, production of liquor, tobacco, pesticides and sericulture. This "ethics-based" investment strategy will eliminate companies like ITC, UB, McDowell and Venky's.

While JM Heritage will hold appeal to a certain section of the society by eliminating a handful of companies from the investment list, it is unlikely to hamper the performance of the fund. A balanced fund with a minimum 51 per cent exposure to equities, the fund managers for JM Heritage will still have a vast basket of sectors from IT to media, telecommunication, FMCG and cyclicals for investments.

Given the fund's charter, it is expected to garner investments mainly in Gujarat and Bombay, which boast of a sizeable Jain population. The fund may also appeal to other vegetarians in India. No wonder, JM Mutual's marketing network has its task cut out and needs to analyse the demographic structure and eating habits of the country's population before selling the fund.

However, for an investor just looking for performance, there's no reason to buy a socially responsible fund. There is no guarantee of high returns since the performance, as in case of other funds will depend only on the ability of the fund manager and the stocks he picks. If at all you decide to buy JM Heritage, it should be because of your religious or ethical convictions.

In the US, where there is a vibrant market for ethical funds, not all socially responsible funds embrace the same principles. Some leave all companies in the nuclear power and weapons industries, while others don't buy liquor, gambling, or tobacco stocks. Other funds pick up companies according to their worker relations, community involvement, or product-safety records. That apart, funds base their stock pickings on religious principles as well like Catholic principles, Mennonite principles and conservative Christian principles.

Source: Value Research

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