What Are Blend Funds?
Definition & Examples of Blend Funds
Learn more about blend funds, their pros and cons, and if they are the right investment choice for you.
What Are Blend Funds?
Blend funds are mutual funds that hold a combination of securities with more than one investment style; they blend growth stocks and value stocks. Growth stocks are generally newer companies with a lot of upside and room for capital gain, while value stocks are those that have shown consistent growth through the years and payout consistent dividend payments.
Value stocks may also be undervalued by the market and priced low compared to their earnings.
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 Blend Funds Work
The purpose of a blend fund is to diversify the equity portion of an investor's portfolio. There are two fundamental ways to make money from the stocks: an increase in a company's share price and dividend payments. Both of these are important for long-term gains and wealth building, so blend funds seek to make it easier to take advantage of both.
The mutual fund's growth portion will consist of stocks with a lot of potential for capital gains and business growth. The value portion will consist of more stable companies that payout consistent dividend payments and have shown the ability to thrive long-term.
For example, instead of a portfolio of just new technology companies or big corporations from more traditional industries, a blend fund may consist of companies such as Coca-Cola, Zoom, Uber, Facebook, Johnson & Johnson, and McDonald's.
Blend funds can benefit many investors, but they're not for everyone. Here are the types of investors who may benefit by investing in blend funds:
- Investors looking for diversification
- Beginning investors
- Long-term investors
- Aggressive investors
Blend funds are good all-in-one choices, so they're ideal for investors looking for diversification. They can also be good investment choices for beginners because you don't have to spend time and effort picking individual stocks. Instead of individually researching companies, you can invest in one fund and be done.
Long-term investors can benefit from blend funds because they typically consist entirely of stocks. Long-term investors usually have 10 years or more before they need to make withdrawals from their investment accounts, so their focus is on growth and not capital preservation. However, this allocation comes risk, so investors should have a high tolerance for market risk and be able to withstand volatility.
There are primarily two types of investors who should not buy blend funds: conservative and short-term. Because blend funds allocate 100% of their assets to stocks, conservative investors may not feel comfortable taking on as 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, investors who need to begin making withdrawals from their investment accounts within three years should avoid using blend funds because of their exposure to stocks.
Blend Funds vs. Balanced Funds
While both blend funds and balance funds focus on diversification, the fundamental difference between them is the type of securities they focus on. Balanced funds, also known as hybrid funds, consist of investments from multiple asset classes, such as stocks, bonds, and gold. Blend funds focus exclusively on equity investments to diversify stock holdings. Balanced funds can contain growth and value stocks in addition to its other investments.
- Blend funds combine both value and growth stocks.
- Blend funds can be good investment choices for long-term investors who have a high tolerance for risk.
- Blend funds generally allocate 100% of the portfolio to stocks.
- Balance funds contain both stocks and other types of investments, such as bonds.
- Conservative investors may want to stay away from blend funds.