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Blend funds are mutual funds that typically combine growth stocks with value stocks, creating a balanced investment approach. This means that some funds include both newer, high-potential companies as well as established, steady-earning companies. Blend funds may be ideal for those who are looking to diversify their portfolios with stocks but who don’t want to choose and manage individual stocks themselves.
Here are the benefits and risks of blend funds, who should invest in them and how they differ from other types of funds.
Benefits of blend funds
Blend funds offer a number of advantages for investors. These include:
- Long-term growth: Designed for investors who are looking for long-term capital growth, blend funds are best for those who can handle market volatility.
- Investment objectives: Investors generally have a choice of various investment objectives ranging from aggressive to conservative.
- Rapid gains: While not guaranteed, blend funds can potentially provide investors with rapid gains, which are typically derived from the growth stocks in the portfolio.
- Professional management: Individuals who invest in blend funds don’t have to manage individual stocks themselves.
Blend fund risks
All investments carry some level of risk, blend funds included. Here are some of the risks involved:
- Market risk and volatility: Blend funds are subject to market risk, and as most blend funds exclusively hold stocks, they’re subject to fluctuations and volatility in the market.
- Management risk: While professional money managers run the funds, they could make poor investment decisions. Additionally, be aware management can change and may make decisions that impact the fund’s performance.
- Inflation risk: If the rate of inflation is greater than the rate of return on the fund, the fund will lose purchasing power.
- High fees: Some blend funds may have higher expense ratios due to the cost of professional management of the fund, whereas individual stocks do not have this cost.
- Tax and regulatory impact: Taxes and regulations, such as capital gains tax and ordinary income taxes on interest and non-qualified dividends, can impact blend fund investments.
Who should invest in a blend fund?
Blend funds are generally suitable for individuals looking for long-term capital growth. They provide professional management and asset allocation, allowing investors to benefit from the potential growth and dividend income of the stocks they hold. Additionally, blend funds are designed to have a performance profile that exceeds or at least matches that of the S&P 500 benchmark.
Since they are composed of stocks, they can have some aspects of growth and value stocks. Growth stocks can have high expense ratios, which can lower investment returns. They can also carry more risk than value stocks. Long-term investors generally find the value aspect more suitable.
“Blend funds tend to be stock-focused with a mix of value and growth strategies. They provide a measure of diversification because over the course of financial markets cycles, growth and value stocks will have varying performance. As result, growth tends to involve more risk, while value can help to mitigate some of that risk,” says Mark Hamrick, Bankrate Senior Economic Analyst. “While a variety of funds might share the blend approach, potential investors should do their research, or work with a financial advisor, to know whether a given fund is for them, and how it might fit into a portfolio.”
What is the difference between a blend fund and a balanced fund?
Blend funds differ from balanced funds because they exclusively hold stocks and do not include fixed-income securities. Balanced funds, however, combine stocks with fixed-income securities, such as bonds and CDs. Blend funds aim to create a diversified portfolio by combining growth stocks and value stocks, allowing investors to benefit from potential capital gains in the growth segment and stable dividend income in the value segment.
Balanced funds, on the other hand, are asset allocation funds. They typically have a mix of fixed-income instruments and equities. Generally, asset allocation is restricted to fixed proportions to help achieve both consistent income and growth in value.
Overall, blend funds are a solid option for certain investors wanting to diversify in equities and not manage individual growth and value stocks. For the risk averse, balanced funds — with their mix of asset classes — might make more sense.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.