As the name suggests, blend funds are like a concoction of two types of funds in one: value and growth stocks. Investing in these funds offers money managers the opportunity to diversify investments among these popular styles in one portfolio. The blend fund type is a particular case of the hybrid fund.
Blend funds – an overview
The purpose of a blend fund is to provide investors with the advantages of growth and value investing, all under one umbrella. Thus, to understand blend funds, let us first look at what growth and value stocks mean.
Growth Stocks Mutual
A growth stock is a stock whose earnings, and thus stock price, are expected to grow faster than the stock market as a whole. These stocks rarely pay dividends since they usually reinvest the earnings they make back into research and development.
Stocks with a low share price relative to earnings are considered undervalued by the market and therefore are considered value stocks. Stocks in this category often pay regular dividends and can rise rapidly in value when investors realize their true worth.
Combining both types of investments in a single portfolio is known as a blend fund. Value stocks typically underperform when growth stocks do well. By owning both assets in one portfolio, you won’t have to worry about predicting how each will perform. Theoretically, you can make money in any direction the market moves.
Why opt for a blended fund investment?
Investors frequently choose blended fund investments to diversify their portfolios. Blend funds are generally managed from a specific universe of investments. In blended fund investments, capitalization is often the determining factor. Thus, investors can choose between large-cap, mid-cap, or small-cap funds.
Blend Fund Research
As a result of the variety in investment strategies of the category, it may be challenging to identify blend funds. Blend funds are typically only available through investment advisors or a specialized investment resource.
Fund research providers distinguish blend funds from other categories. To facilitate the identification of funds under various categories, such as blended funds, style box investment research was developed and popularized.
Blend Funds: Who Are They For?
Despite their popularity, blend funds aren’t suitable for everyone. The following types of investors may want to consider blend funds:
- Investors seeking diversification
- Investors who are just starting out
- Investors with a long-term perspective
Investors looking for diversification should consider blend funds, which offer a broader view of the market. Additionally, they can be good choices for people starting in the market since you don’t need to pick individual stocks. By investing in a single fund, you don’t have to research the stock choices individually.
Blend funds are popular among long-term investors because they are made up entirely of stocks, and the stock market tends to grow over time. Investing long-term means most investors won’t take withdrawals until around ten years from now, so their focus is growth, not capital preservation. It is also important to note that 100% of stock allocations come with risk, meaning people following this method should tolerate short-term market swings and highs and lows.
Why Should You Avoid Blend Funds?
It is recommended that conservative investors and those with a short time horizon do not purchase blend funds. The fact that blend funds devote 100% of their assets to stocks makes them less appealing to investors who are more conservative with their money.
They may want to allocate the majority of their portfolio to lower-risk investments, such as bonds, and not more than 50% to stocks. Due to their high reliance on stocks, blend funds should not be used by short-term investors who need to withdraw money within three years.
Blend Fund Investments: Types
Small-blend fund investments
The small-blended fund invests in both growth companies and value companies with a smaller market capitalization. In the United States, small-cap stocks are those whose capitalization is between 1% and 10% of the market.
Large Blended fund investments
In size, growth rates, and price, large-blend funds resemble the overall U.S. stock market. An equity company with a market capitalization of at least 70% is considered a large-cap. It is assigned to the value portfolio type when no growth or value tendencies predominate in a portfolio. Since these portfolios tend to invest across a broad range of U.S. industries, their returns tend to be similar to those of the S&P 500 Index.
Advantages of large blended investments:
In comparison to other types of mutual funds, large blended funds can avoid many risks. The stock price of more prominent companies tends to fluctuate less than that of smaller, rapidly-growing companies. Larger, more established companies are also less likely to declare bankruptcy. Combining growth and value stocks reduces your market exposure and allows you to smooth out your long-term returns. When the market is experiencing a downturn, value stocks often outperform growth stocks.
The following are two examples of large blended funds in the investment market.
AAM/Bahl & Gaynor Income Growth Fund
Fund objectives include current and growing income, downside protection, and long-term capital appreciation.
American Century Core Plus
In addition to investing in growth and value stocks, the American Century Core Plus fund seeks to outperform the broad stock market.
Putting it all together, if you are interested in holding growth and value stocks in a straightforward package, a blend fund might be the right choice. In some cases, obtaining exposure to both sides of a market can be simpler and more cost-effective when buying one fund. When searching for a blend fund that works for you, keep your needs in mind and the fund’s risk level too.