Traditional Investing Versus Socially Responsible Investing

By: Gio Naidas and Mariel Vincent Rapisura

sedpi trainer 160116Investing is the act of purchasing a financial product, asset, or other item of value with an expectation of favorable future returns. Investments provide the benefit of generating passive income which helps us attain our financial goals, afford higher standards of living and at the very least beat inflation. Investing can bring us financial rewards but it comes with its own risks. In recent years, the financial sector has been providing us with a wide array of financial products that caters to our investing needs.

SEDPI promotes socially responsible investments that are not just concerned about profitability, yield or return but are also used for development. Investments have more positive social impact if these are used to improve the quality of life of the poor, protect the environment and empowerment of the marginalized to exercise human rights.

Investments in cooperatives and rural banks can be considered as socially responsible since they promote local economic development in the rural areas where poverty is most severe. They provide financial access to poor households that enable them to save, borrow money to finance their farms or microenterprises and buy insurance for protection of their lives and assets.

Those who are new to investing are lured to traditional investments such as the stock market, mutual funds, unit investment trust funds, investment-linked insurance, treasury bills, corporate bonds, money market accounts and many more. Socially responsible investments are overlooked because they seem less exciting as traditional investments. Socially responsible investments such as time deposits from cooperatives and rural banks are often perceived to be less superior organizations offering second-rate financial products.

While it is true that there are a lot of weak cooperatives and a lot of rural banks close down, these organizations could provide safe and attractive returns if you know how to choose the right ones.

Like any other investment product or instrument, one must learn more about the organization and financial product you are investing in. The same rigor in investigation applies for traditional investments and socially responsible investments.

In the case of cooperatives and rural banks, it is best to scout for the biggest ones and study their annual report and audited financial statements. Aside from these, you also have to study the industry where they operate and local market conditions. You can invest in a cooperative as a lender by depositing in their time deposit products or as an owner through purchase of membership shares. Either way, income derived from cooperatives has the advantage of being tax-free. You can also invest in rural banks through time deposits and limit your exposure to PhP500,000 since this is the maximum insurance coverage for deposits from the Philippine Deposit Insurance Corporation. If the maturity of your time deposit in a rural bank is more than five years, this is already tax-free. Don’t worry that the maturity is long since banks generally compound interest on deposits quarterly.

Both traditional and socially responsible investments have risks. They could provide attractive returns or they could also wipe out your investment portfolio. What is important is you study what you are getting into very well. It is not enough that you only get information from your friends or agents. Watch the news, read the prospectus or company profile of your investments and attend courses to arm yourself with the knowledge and skills to differentiate between a good and a bad investment.

So the next time you decide on where to invest, it is important to ask where you want to add value. Do you prefer stock market investments, mutual funds or unit investment trust funds that would benefit a few? Or do you prefer socially responsible investments that serve the bottom of the pyramid.

At the end of the day, you have to strike a good balance between profitability and supporting organizations that provide positive impact to society. One way of achieving this is through diversification of investments.