Definition and Example of a Blend Fund
Typically, blend funds are mutual funds, in which money from investors is pooled and managed by a fund manager. Mutual funds are a basket of investments or securities that can include stocks, bonds, and money market accounts. However, blend funds tend to invest solely in equities, including a mix of growth and value stocks.
Growth stocks consist mainly of newer companies with a lot of upside and room for gains. Those who invest in growth stocks are often looking to outperform the overall market and are usually willing to take on more risk—meaning volatility or price fluctuations—to earn those gains. Examples of growth stocks include Amazon.com (AMZN) and Tesla Inc. (TSLA).
Value stocks tend to be more established companies that have shown steady earnings growth but less steep growth through the years and make consistent dividend payments. They are relatively less risky (and more fairly priced) than growth stocks. Value stocks tend to appeal to buyers who want a steady cash flow and moderate growth over the long term. Examples include Coca-Cola (K) and Verizon (VZ).
Example of a Blend Fund
The T. Rowe Price Dividend Growth Fund (PRDGX) is a blend fund, which seeks to incur dividend income and long-term capital growth by owning equities. The fund's management believes that companies with an excellent track record of dividend payouts tend to experience long-term growth. Some of the holdings include Microsoft, Visa, Apple, and United Health Group.
For many investors, 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 might have a low stock price but might offer great potential.
How Do Blend Funds Work?
A blend fund is designed to merge growth and value investment styles into one investment vehicle. 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: through an increase in a company's share price and through dividend payments, both of which are important for long-term gains and building wealth. Blend funds seek to make it easier to reap the advantages of both.
The mutual fund's growth portion will consist of stocks with a great deal of potential 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 big corporations in a single sector with one focus), while a blend fund may consist of stock from a diverse array, such as Coca-Cola, Zoom, Uber, Meta (formerly Facebook), Johnson & Johnson, and McDonald's, along with many smaller companies as well.
Whom 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 seeking diversification
- Beginning investors
- Long-term investors
Blend funds are useful ways to cast a wide net in the market, so they're ideal for investors who are looking for diversification. They can also be good choices for people who are 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 might not want to take on this much market risk. For example, they might 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.
Blend Funds vs. Balanced Funds
While both blend funds and balanced 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 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 their portfolios to stocks.
- Blend funds can be good choices for long-term investors who have a high tolerance for risk.
- Conservative investors might want to stay away from blend funds.
- Balance funds contain stocks and other types of investments, such as bonds.