As the name implies, blend funds are like a fusion of two types of funds in one: growth funds and value funds. The idea behind blend funds is that they promote two distinct goals, and allow investors to set their sights on long-term growth and on making rapid gains, at the same time.
Learn more about blend funds, their pros and cons, and if they are the right investment choice for you.
What Makes Up a Blend Fund?
First, all blend funds are mutual funds. This means when you invest in one, your money is pooled with others, and then managed by a person or firm who invests the sum. Mutual funds can consist of many types of securities (stocks, bonds, money market, etc.), but blend funds stick solely to equity, most often 100% stocks. Specifically, blend funds invest in growth stocks and value stocks.
Growth stocks consist mainly of newer companies with a lot of upside and room for capital gain; people who invest in growth stocks are often looking for a quick buck, and might be willing to take more risk (and pay higher prices) to get it. Value stocks are those that have shown steady growth through the years and payout consistent dividend payments. Value stocks are less risky (and cheaper) than growth stocks, and they appeal to buyers who want a steady cash flow and growth over a longer span of time. You can think of a blend fund as a tool for merging these two investment styles into one vehicle.
For many, the appeal of value stocks is that they can be priced low compared to their earnings. A new company that has yet to make a name for itself in the market may sell low, but offer great promise.
Both investment styles have their pros and cons, and many investors would like to take advantage of both instead of just one. Investors wanting one diversified mutual fund that combines the growth and value styles may consider investing in blend funds.
How Do Blend Funds Work?
The purpose of a blend fund is to diversify the equity portion of an investor's portfolio. There are two basic ways to make money from the stocks: the first is through an increase in a company's share price; the second is through dividend payments. Both of these are important for long-term gains and building wealth, so blend funds seek to make it easier to reap the perks of both.
The mutual fund's growth portion will consist of stocks with a great deal of promise for capital gains and business growth. The value portion will consist of stocks from more stable companies that payout steady dividend payments and have shown the ability to thrive long-term.
To compare: a standard mutual fund might have a portfolio of stock from a single sector (maybe just new tech companies, or from big corporations in a single sector with the same focus), while a blend fund may consist of stock from a diverse array, such as Coca-Cola, Zoom, Uber, Facebook, Johnson & Johnson, and McDonald's, along with many smaller companies as well.
Who Are Blend Funds For?
Blend funds have wide appeal, but they're not for everyone. Here are the types of investors who may find what they're looking for in blend funds:
- Investors looking for diversification
- Beginning investors
- Long-term investors
- Aggressive investors
Blend funds are useful ways to cast a wide net in the market, so they're ideal for investors looking for diversification. They can also be good choices for people just starting out in the market, because you don't have to spend time and effort picking individual stocks. Rather than having to research each and every stock choice, you can invest in one fund and be done.
Long-term investors like blend funds because they are made entirely of stocks, and the stock market tends to grow if given enough time. Most long-term investors have roughly 10 years or more before they need to make withdrawals from their accounts, so their focus is on growth and not capital preservation. However, with this 100% stock allocation comes risk, so people who follow this method should have a high tolerance for market risk and be able to withstand short term highs and lows.
Who Should Avoid Blend Funds?
There are two types of investors who should not buy blend funds: those who are conservative and those who are short-term. Because blend funds allocate 100% of their assets to stocks, people who are more conservative with their money may not want to take on this much market risk.
For example, they may want to keep less than 50% of their portfolio exposed to stocks and have most of it allocated to lower-risk investments, such as bonds. Likewise, short-term investors who need to begin making withdrawals from their accounts within three years should avoid using blend funds because of how much they rely on stocks.
How Do Blend Funds Differ From Balanced Funds?
While both blend funds and balance funds focus on diversification, the main difference between the two is the type of securities they use. Balanced funds, also known as hybrid funds, consist of investments from many asset classes, such as stocks, bonds, and gold. Blend funds focus solely on equity and stock holdings. Balanced funds can contain growth and value stocks as well as a full range of many other types of investments.
- Blend funds combine both value and growth stocks.
- Blend funds most often allocate 100% of the portfolio to stocks.
- Blend funds can be good choices for long-term investors who have a high tolerance for risk.
- Conservative investors may want to stay away from blend funds.
- Balance funds contain both stocks and other types of investments, such as bonds.