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How Alternative Energy Mutual Funds Work

Investing in an Alternative Energy Mutual Fund
England's 25-turbine Burbo Bank Wind Farm can produce over 90 megawatts of energy.
England's 25-turbine Burbo Bank Wind Farm can produce over 90 megawatts of energy.
Christopher Furlong/Getty Images

Before you invest in an alternative energy mutual fund, you'll need to do a lot of homework.

First, learn as much as you can about alternative energy sources. As you read, ask questions:

  • How likely is it that this source of energy will be a good substitute for current sources of energy?
  • How cost-effective will it be?
  • What areas of the world can utilize this source of energy?

Next, carefully research individual mutual fund companies. Use authoritative web resources such as Morningstar to gather information about the funds.

  • What is the past performance of the fund?
  • What companies are currently in the portfolio?
  • Does the fund manager actively manage the fund?

Compare the information you've gathered with information from the Web sites of the mutual funds you're interested in. Remember that some of the information on the mutual fund sites will be biased in favor of the fund and what it can do in terms of performance.

Order a prospectus from each mutual fund you're interested in. The prospectus will give you detailed information about the fund, including all of the fees that you can expect to pay.

If the prospectus meets with your approval, you can either buy shares in the fund directly from the fund company or from an online broker such as Etrade, Ameritrade or Charles Schwab.

Alternative energy mutual funds represent one way that you can profit from a sector that's getting a lot of press today. Owning a group of companies as opposed to owning individual companies tends to lower your risks. Be aware, however, that any investment carries a certain amount of risk. What would happen, for example, if the price of oil suddenly went down considerably? Would alternative energy companies lose their favor in the investment community?

Also, just because a professional is managing the stocks in your mutual fund, this doesn't mean you should forget about your investment. Be proactive by frequently checking the status of your fund on an online brokerage site. Also, carefully study the quarterly statements you receive from the fund company. Your vigilance will pay dividends in many ways.

If you'd like to learn more about alternative energy mutual funds and related topics, you can follow the links on the next page.