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George Michael

once sang, "You got to have faith." But is faith alone the basis for investing in a mutual fund?

By rolling out mutual funds that invest according to religious principles, some mutual fund companies are hoping that investors will literally practice what they preach. Though the number of these funds is small compared with secular funds, religious mutual funds are a growing niche within the socially conscious fund category. There are now at least 22 religious funds listed in the


database, up from just one, 10 years ago.

"You can get performance and stick to your principles at the same time," says F. Scott Valpey, portfolio manager of the

Azzad Dow Jones Ethical Market Fund

, which launched in October.

While there are several religious funds cropping up, whether to employ your religious beliefs in your portfolio is both a personal and financial decision for investors. On the personal front, they need to weigh whether they want their faith to dictate what type of companies they can invest in. Also, investors must decide if they're comfortable applying pressure on those companies to operate more closely to their particular belief system, which some religious mutual funds do.

On the financial end, investors run the risk of a lack of diversification in their portfolios -- because a narrow band of companies may fit their religious fund's belief system -- and a high cost structure.

"People who make the decision to invest in a socially conscious way have to think seriously about what they're willing to give up in terms of diversification and costs," says Morningstar analyst Emily Hall.

If you do ultimately decide to invest according to your religious tenets, as with any mutual fund, it's important to thoroughly review the fund's management, investment style and track record.

"The things

investors need to think about outside of their religious views is really how do these funds fit into my portfolio?" says Hall. "For the most part, it's relatively difficult to have a balanced portfolio of religious funds because there just aren't that many."

Hall says, in general, there's not much difference between the performance of secular funds and socially screened funds.

Azzad Dow Jones and


funds are similar in that they invest based on Islamic principles, which require investors to share in profit and loss, receive no usury or interest, and not invest in companies that are involved in activities that run counter to Islamic principles. That includes businesses that are involved in pornography, gambling, pork processing and interest-based banks or financial institutions. Amana Funds launched its first fund in 1986 and was for a while one of the only U.S. mutual funds to manage money according to Islamic principles.

Although the amount of money invested in Islamic mutual funds in the U.S. has been limited so far -- Amana's two funds, the

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Amana Mutual Funds Trust Income combined with the

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Amana Mutual Funds Trust Growth, command only $50 million in assets -- Azzad fund manager Valpey hopes to have $100 million in assets under management in the next 12 months.

The Azzad fund, which tracks companies represented in the

Dow Jones Islamic Market Extra Liquid Index

, lists

blue-chip heavyweights such as


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among its top-10 holdings. That index is down almost 14% in the year to date.

Other fund families, such as the

Aquinas Funds

, try to appeal to Catholics by investing only in companies that promote Catholic values. In addition, the funds participate in shareholder activism, trying to get companies to change their policies to reflect Catholic teachings. Aquinas Funds' president Frank Rauscher says the company's areas of interest include issues such as abortion, contraception, gender and race discrimination, military weapons of mass destruction and affordable housing.

One example Rauscher cites is


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, which he says stopped donating to Planned Parenthood because of pressure from the fund family. A Whirlpool spokesman said the company stopped contributing to Planned Parenthood a few years ago but could not confirm whether or not it was because of pressure from shareholders.

"Organizations are going to have a lot more heat put on them to get in line with the investment policies of the values of their investors," says Rauscher.

Another fund family, the

MMA Praxis Group of Mutual Funds

, offers four mutual funds that are not only governed by Anabaptist principles, but also serve as shareholder activists on issues such as fair labor practices and human rights issues.

Whatever the stance of the fund, Morningstar's Hall says it's important to thoroughly understand its principles before jumping in because one group's cause may be another's curse. For example, many funds under the religious or socially conscious umbrella object to companies that engage in gay-friendly practices such as offering domestic partner benefits.

Another caveat: Check the fund's expenses, because the devil may lurk in the details. The small size of many religious-based fund families and the added expense of researchers to screen out questionable companies may cost the investor more than the average mutual fund in the end.