Community Investment 101

Do you want your investment decision to have a positive impact? When you see that your neighbors have many problems that need to be solved, do you find it difficult to care about what is happening in distant countries? If so, community investment may be the solution.

In this article, we will explain how this socially responsible investment works and how to make it work for you.

What is community investment?

Community Investment (CI) is a sub-category of socially responsible investment that aims to earn returns for investors while contributing to a noble cause. Specifically, CI uses investment funds to provide safe and affordable housing, employment opportunities, education, medical care, financial counseling, child care and other basic community services in the local area. It allows you to use investment funds for a specific community, usually your own community. If there is no specific community you want to focus on, CI can also promote investment in underserved communities more broadly.

Institutions that provide community investment opportunities can help individuals and companies that would otherwise be unable to obtain financing, and allow people to help themselves in the long run. According to the Sustainable and Responsible Investment Forum, community investment is one of many rapidly developing areas of socially responsible investment.

How to invest in your community

Since community investment covers a wide range of activities, there are many options for implementing community investment strategies.

Community Development Bank

First, instead of choosing a common option for your checking and savings accounts, deposit the money in the Community Development Bank, which provides loans to individuals and businesses that cannot obtain loans. Like traditional banks, community development banks are underwritten by FDIC, but unlike traditional banks, they focus on providing services to low- and middle-income customers.

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You can find banks certified by the U.S. Department of the Treasury as dedicated 60% or more of their services to low-income communities on the Community Development Financial Institutions Fund website.

Proxy bond

Investing in institutional bonds is another form of community investment. Institutional bonds are issued by government agencies such as Ginnie Mae and government-sponsored enterprises (GSE) such as Fannie Mae and Freddie Mac. These entities help provide housing for those who cannot afford it.

The GSE bonds that fund Fannie Mae and Freddie Mac are not government bonds, so they do not receive the full trust and credit support of the U.S. government like Treasury bonds. These GSEs are shareholder-owned companies, and you should study their bonds and assess their credit risk just like other corporate bonds.

Like all bonds, agency bonds and GSE bonds carry inflation risks, and some also carry redemption risks. However, their credit risk is relatively low. Due to the additional risk, using these bonds can get a slightly higher return than using U.S. Treasury bonds, but unlike U.S. Treasury bonds, interest is not tax-exempt.

Ginnie Mae is a government agency. The investment in the agency’s securities does come with government guarantees, and theoretically there is no risk of default. However, if you want to invest in Ginnie Mae, you will not invest in bonds; you will actually invest in mortgage-backed securities, which should be treated with caution in view of the 2008 financial crisis. To invest in these entities, you can buy their securities through a broker. You need $25,000 to start investing in institutional bonds.

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Other options for community investment

  • Buy real estate in poor communities, provide affordable housing for low-income tenants, and revitalize neglected communities.
  • Invest directly in community development loan funds or pools of funds.
  • Invest in socially responsible mutual funds focusing on community investment.
  • Directly invest in municipal bonds in underserved communities to provide funding for infrastructure, educational facilities, and public products and services.
  • Buy stocks in public companies that invest in underserved communities. This strategy is a less direct form of community investment, but it provides an option for investors seeking higher returns than fixed-income community investments.

Return on community investment

If everything goes according to plan, community investment will be very beneficial. You will create wealth for yourself from the return on investment and create wealth for others by improving their economic opportunities. In the best case, CI is like a charitable donation, but it may give you money in return. If your investment is at a loss, you may get some comfort from deducting your loss from your tax return and know that your financial situation is not worse than when you donated the same amount.

Another reward of a successful community investment plan is personal. When you improve the lives of individuals in your community, you will get results you can see. If you invest in a place close to home, you can even improve your life experience in the community.

Disadvantages of this method

Community investment also has disadvantages. It may bring higher risks; you often invest in people and companies that traditional lenders believe are too risky to lend. In addition, your additional risk may not necessarily be compensated with higher returns like traditional investments.

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CI also limits your investment options. Many community investments are used to provide low-return tools, such as savings accounts and government bonds. In order to obtain high enough returns to meet your long-term financial needs, you need to expand your investment scope beyond these low-return investments.

You can meet this need by investing in company stocks with a strong community focus or expanding your parameters to include a wider range of socially responsible investment. Many investors will find that investing in the community in only a portion of their portfolio makes the most financial sense. However, this does not mean that you have to choose an investment that you morally oppose in the rest of the portfolio.

Community investment is also often more time-consuming than traditional investment. You must not only consider the risks, potential returns and costs, but also carefully consider whether the investment meets your criteria for serving the community.

Bottom line

Although the goal of community investment is the same as other types of socially responsible investment, which is to do well while gaining investment returns, this is not to say that traditional investment methods are not beneficial. In fact, there is a lot of overlap between these two categories. However, if you want to consciously invest in the community, please carefully review your investment options before investing to ensure that your funds can meet your intended purpose.

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