Social Mutual Fund - A letter to Dr. Muhammad Yunus

I'm glad to be writing to you. I have heard you speak in Abu Dhabi and Singapore, and your ideas inspired me to work on international development ever since.

Well, both in Abu Dhabi and Singapore, one of the key ideas you raised was that of establishing a stock exchange for social enterprises, companies which focus not only on their bottom-line but also have a social mission. That set me thinking about how conventional finance could be put to use for social causes and the idea of a social mutual fund occurred to me.

A social mutual fund: A social mutual fund, as I see it, would be a conventional mutual fund in its structure. That is it would be a pool of small units of capital contributed by a large number of investors. However, the fund would make its investments with a social mission in addition to earning monetary returns.

Possible portfolio allocation: The portfolio allocation could therefore be two tiered. The first tier is the basic allocation in equity, bonds, commodities etc. The second tier would be a cause-based allocation, for instance 20% of the funds invested in health care, women’s welfare, education, microfinance and environmental causes each (just an illustration).

How the fund would serve social causes:

There are two ways to structure the fund -

1. Based on what kind of investments the fund makes - One way is to allow the fund to invest in social enterprises that further the pre-determined causes, such as the ones described above. This type of mutual fund would be for investors who would want their money to help grow companies which engage in social causes.

2. Based on how the returns from investments of the fund are used - The other, more useful way to structure the fund would be to govern how its returns or dividends are distributed.

Many people make donations to social causes of their choice, either one time or on a periodic basis. However, these are often isolated and too small to have any major impact. Besides, such small donations are generally depleted in one shot. Instead, if such donations are channeled into a mutual fund, we could accumulate a significantly large amount to invest in financial markets and generate higher returns because of the sheer volume of funds invested. It is again the age-old concept of ‘economies of scale of investment’. These higher returns from such a mutual fund investment could then be systematically channeled to either one cause or to a portfolio of causes.

As opposed to individual investors donating their earnings or part of it to causes of their choice in an isolated and haphazard fashion, this will systematically organize a flow of donations on a larger scale thus ensuring significant impact.

Benefits: This system addresses an important problem faced by several NGOs dependant on donations. It ensures a supply of funds to the beneficiary organizations, which is secure (because the fund would make diversified investments), regular and diversified (in terms of the number of sources, as opposed to a single rich donor). In the absence of such a social mutual fund and this system of donations, such NGOs and charities spend huge amounts of resources on fund-raising every year.

Secondly, donations are being made from money earned, not by depleting an existing pool of wealth or an endowment. Possibly, endowments of large philanthropic foundations are invested in a similar manner.

However, the common man on the street is not able to contribute to these large endowments in small amounts like he could to a mutual fund by buying the number of units as suitable to his pocket. There are millions of simple, middle class people around the world who would still like to contribute to social causes. Through this social mutual fund they could contribute much larger amounts simply because of the ability to reap economies of scale.

I would be grateful if I could seek your views on this idea and to start a dialogue on how this could be made possible.