What Are Blend Funds?

Find Out If Blend Funds Are a Good Investment Option for You

money management
Should you invest in blend funds? Here's how to know. Getty Images

You've probably heard of growth funds and value funds but what exactly are blend funds? Put simply, blend funds are a "blend" of growth stocks and value stocks. But to determine if blend funds are the best investment choice for you, there are a few more things to know.

How to Identify Types of Blend Funds

Stock mutual funds are classified by their investment style, meaning growth or value, but they are also classified by their market capitalization, also known as "market cap," which is the size of a business or corporation equal to the share price times the number of outstanding shares.

Mutual funds are generally categorized as large-cap, mid-cap, or small-cap.

Next comes the growth, value or blend descriptor. For example a large blend fund would be one that primarily invests in a blend of growth and value stocks that are large in by capitalization (or simply "large-cap stocks").

Often the largest index funds, such as Vanguard 500 Index (VFINX) or Fidelity Spartan 500 Index (FUSEX), are categorized as blend funds because, by nature they are a blend of growth stocks and value stocks.

The Difference Between Blend Funds, Hybrid Funds, and Balanced Funds

Although blend funds hold a mix of different investment styles, they are not the same as balanced funds or hybrid funds

Balanced funds and hybrid funds are the same in that they are asset allocation funds, which means the asset allocation remains relatively fixed and serves a stated purpose or investment style. For example, a conservative balanced fund might invest in a conservative mix of underlying investment assets, such as 40% stocks, 50% bonds and 10% money market.

However blend funds typically invest in only one asset class, which is stocks (also called "equities"). Again, the stocks in blend funds will include both growth and value stocks.

While balanced funds can contain growth and value stocks, they will also hold at least some bonds and/or cash.

Should You Invest In Blend Funds?

Blend funds may not be the best choice for everyone but they are often ideal for long-term investors because of their inherent diversification.

Investors who should avoid investing in blend funds are those who are conservative (they prefer lower relative market risk) or those who will be investing for short periods of time, such as less than three years. The reasoning here is that blend funds are usually 100% stocks. And as a standalone investment choice, blend funds are not a good idea for investors with low tolerance for risk or short investment time horizons.

However, blend funds, especially index funds, can be good investment choices for beginners with long-term objectives and high relative tolerance for risk. Blend funds are also a good choice to use as a core holding from which to build a diverse portfolio of mutual funds, which may include several other fund types.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as tax advice or investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.