There are different types of community investing products, and all exhibit performance consistent with the expectations for their asset classes. Depository products earn rates of return comparable to depository products purchased from conventional banks and credit unions; loan funds have performed consistently with the terms set by the investor at the beginning of the investment; and venture capital investments, though they vary with the success of the business, have followed the expected cyclical pattern of growth and financial return for venture capital investments.
Savings accounts, checking accounts, individual retirement accounts (IRAs) and certificates of deposit (CDs) purchased from community development banks and credit unions are market-rate investments and earn returns comparable to these products at conventional banks and credit unions. As in the traditional market, rates of return on community development depository products vary with the investment term and in some cases, the type of IRA or CD. For current rates of return, investors must contact the individual bank or credit union.
Investors can also elect to purchase depository products, usually CDs, from a community development bank or credit union that earn a below-market rate of return in exchange for more money being used for social impact. Purchasing below-market products allows the institution to direct a larger portion of the investment into community development work.
Loan Funds, Guarantee Funds, and Pooled Funds
Investments in loan funds, guarantee funds, and pooled funds perform much like fixed income investments in that they have a fixed rate of return and a minimum investment term of one year or greater. The rate of return is determined by the investor, the institution, the length of the term (1-5 years), and the size of the investment, and is generally between 0-4 percent. Unique from most other investments, investments in these high-impact products are not susceptible to the whims of the traditional market. There is no fluctuation in the rate of return once it is established, although some loan funds do reserve the right to prepay loans before maturation.
Given these characteristics, loan fund performance has been consistent even through economic downturns and rapid expansion of the community investing industry. Opportunity Finance Network, with more than 130 loan funds in its membership, reports that all the CDFIs in its membership have never lost a penny of investment capital. Their performance has been consistent, yielding the expected returns for investors. Opportunity Finance Network recently developed the first rating system for domestic CDFIs. The CDFI Assessment Rating System (CARS) is designed to rate CDFIs based on financial strength and performance as well as social impact performance. More information on CARS is available through our page on Community Investing Innovations.
Investments in community development venture capital funds are equity investments whose performance is dependent upon the success of the businesses they finance. Venture capital investing follows a cyclical pattern because emerging businesses go through various stages of development, all of which yield different rates of return. This, along with the fact that most CDVC funds are young, makes it difficult to make comprehensive performance assessments on venture capital investments. However, in 2002 the CDFI Data Project found that older venture capital funds report gross internal rates of return between 8 and 17 percent.