With socially responsible mutual funds, you can make money and still sleep at night. Are they right for your portfolio?

Some people want their invested dollars to do more than just grow their personal wealth. Why not make the world a better place, too? That's why you see a wide range of "socially responsible" mutual funds these days- investment vehicles for the investor with a moral compass.

Clean cash? I'm in!

The concept is simple-if you buy this type of fund, you get a portfolio of professionally screened and selected companies that don't do anything too evil to the environment, to society, or to the youth of the world. But even this seemingly honorable investing avenue is full of pitfalls and traps.

The biggest problem is that all that handpicking takes work. The fund manager isn't just shadowing the S&P 500, or trading stocks automatically on technical and financial changes. Each business has to get a fine-toothed comb treatment to make sure that it deserves to be held in that basket of conscious funds. The selection criteria vary from fund to fund, but they often exclude vice stocks (tobacco or alcohol), while monitoring corporate climate, marketing messages, responsible products, acceptable manufacturing processes, and respect for human rights.

The price of ethics

Doing all that research for more than nine thousand potential investment targets isn't cheap, and socially responsible funds tend to have hefty expense ratios as a result. Paying 2 percent of your holdings in annual management fees isn't uncommon, and you could get slapped with a 4 percent front-load fee just to start an account.

Besides high costs, the strict selection criteria will remove many of the most promising stocks on the market from consideration. Finding winners in a much smaller stock selection will be a challenge for even the most talented fund manager.

Don't give up

That said, there are some decent performers with low management costs available to the conscious investor. The advent of socially responsible index funds, like the KLD Select Social, and the FTSE4Good, have led to low-cost index funds. Bellwether mutual fund companies like TIAA-CREF and Vanguard also have actively managed funds with fees below 0.25 percent per year. None of them have had much luck beating the broader market, but some come close to the S&P 500's returns.

You might have your own opinion on what makes a responsible investment. If you're concerned about the environment, consider the PowerShares Water Resources Fund, or its Wilderhill Clean Energy sibling. Strong faith could lead you to the Ave Maria Catholic Values fund. When you pick a specialty, your chances of beating the broader market look a lot better, too.

You don't have to leave your morals behind when you walk onto Wall Street. It's a bit harder to come out ahead when you're working with any kind of restrictions, but all it takes is a little legwork and some faith in humanity. Who says that you can't put your money where your heart is?

Published on May 11, 2006