What Are Blend Funds?
Find Out If a Blend Fund Is a Good Investment Option for You
You've probably heard of growth funds and value funds but what exactly are blend funds? Investing in a blend fund enables an investor to gain access to growth stocks and value stocks, in just one mutual fund. To know for sure if blend funds are the best investment choice for you, there are a few more details to learn before buying.
What Are Blend Funds?
Blend funds are mutual funds that hold a combination of securities with more than one investment style, most commonly the growth and value styles. Put simply, blend funds are a "blend" of growth stocks and value stocks. Investors wanting one diversified mutual fund that combines the growth and value styles may consider investing in blend funds.
How Blend Funds Are Categorized by Market Cap
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." In reference to stock investing, the market cap 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 by measure of capitalization (or simply "large-cap stocks").
A prime example of a large-cap blend fund is Vanguard 500 Index (VFIAX) and similar index funds. Because S&P 500 index funds hold roughly 500 of the largest U.S. stocks, they will naturally consist of both growth and value styles.
The Difference Between Blend Funds and Balanced Funds
Although blend funds hold a mix of different investment styles, such as growth and value, it's important not to confuse them with balanced funds, also known as hybrid funds.
Balanced funds consist of a mix of different asset classes, such as stocks and bonds; whereas blend funds typically just hold a combination of growth and value stocks (not bonds). While balanced funds can contain growth and value stocks, they will also hold at least some bonds and/or cash.
Who Should Invest In Blend Funds
Here are the types of investors who may benefit by investing in blend funds:
- Investors looking for diversification: Blend funds can be good all-in-one choices for investors who want both growth and value stocks in one mutual fund, rather than two. Therefore, blend funds are ideal for investors who are looking for diversification.
- Beginning investors: Blend funds, especially index funds, can also be good investment choices for beginners . 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.
- Long-term investors: Blend funds are appropriate investments for long-term investors because they typically consist entirely of stocks. Long-term investors are typically have 10 years or more before they need to make withdrawals from their investment accounts.
- Aggressive investors: Because blend funds often allocate 100% of their assets to stocks, investors should have high tolerance for market risk, which is the risk of losing the principal amount invested.
Investors Who Should Not Buy Blend Funds
There are primarily two types of investors who should not buy blend funds:
- Conservative investors: Because blend funds often allocate 100% of their assets to stocks, investors should have low tolerance for market risk should either avoid blend funds altogether or at least keep exposure to a minimum. For example, a conservative investor may want to keep less than 50% of their portfolio exposed to stocks. The majority of the portfolio should be allocated to lower risk investments, such as bonds.
- Short term investors: 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 can be good investment choices for long-term investors who have a high tolerance for risk. This is because blend funds typically allocate 100% of the portfolio to a blend of growth stocks and value stocks. High allocations to stocks are most appropriate for long holding periods, such as 10 years or more.
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.