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Blend fund managers at workMutual funds and exchange-traded funds can make investing easier. Instead of buying individual stocks or bonds, you can buy a collection of them in a single fund. But all mutual funds aren’t the same, and it’s important to know what type of fund you’re buying. A blend fund is one example of a mutual fund that follows a specific investment strategy. If you’re looking for exposure to growth and value stocks in one place, blend funds could be right for you. But it’s helpful to understand how these funds work and the pros and cons before making an investment. For additional expert guidance, consider getting paired with a trusted financial advisor in your area.

Blend Fund, Definition

A blend fund is a mutual fund that holds both growth stocks and value stocks. The fund’s asset allocation is “blended” between two very different types of equities.

If you’re not familiar with the differences between growth stocks and value stocks, here’s an explainer. Growth stocks are associated with companies that have high growth potential. Specifically, the company and its share price are expected to grow at an above-average pace compared to the rest of the market. Amazon (AMZN) and Facebook (FB) are, at the time of writing, two of the most recognizable examples of growth companies.

Value stocks are companies that are believed to be undervalued by the market as a whole. These companies are often desirable to buy-and-hold investors who are looking for bargain stock buys that will grow in value over time. These are usually established companies that pay out dividends to investors and are viewed as less risky compared to growth stocks. Coca-Cola (K) and Citicorp (C) are, at the time of writing, examples of value stocks.

Some investors lean more toward growth stocks while others prefer value. But if you’re looking for a way to split the difference and invest in a little of both, a blend fund offers a way to do that.

How Blend Funds Work

Fund manager speaks to clientsUnlike other mutual funds or ETFs that include stocks, bonds and other investments, blend funds often concentrate holdings almost exclusively on stocks. A blend fund manager chooses which growth stocks to invest in and which value stocks to hold inside the fund. The fund manager also chooses how to allocate the fund in terms of what percentage to dedicate to growth and what percentage to dedicate to value.

In terms of how those stocks are chosen, it varies based on the objectives of the fund and the fund manager’s style. But generally, it’s common to find blend funds that are divvied up by market capitalization. So you may have a blend fund that includes only large-cap value and growth stocks or one that invests solely in mid-cap growth and value stocks.

The idea behind a blend fund is that as an investor, you get the best of both worlds by diversifying with growth and value. One of the main advantages of investing in growth stocks is that those companies have the potential to see steep price increases. That could mean bigger returns for you if you bought into the stock when prices were lower.

Growth stocks tend to be riskier than value stocks since they’re often newer companies that are heavily focused on reinvesting to expand their footprint. Value stocks can help to balance that risk out.

With a value stock, the emphasis is on finding undervalued companies that will increase in price over time. Value stocks are less risky because the companies usually have longer track records. And they can also provide dividend income alongside investment returns from price appreciation.

Blend Fund Pros and Cons

Blend funds can suit a variety of different investor types, including newer investors and those who are more experienced in the market. But deciding whether you should invest in blend funds requires taking a closer look at the advantages and potential disadvantages.

Here’s what can be good about blend funds:

  • They offer a simplified way to invest in both growth and value stocks simultaneously.
  • You can use them to increase diversification and manage risk inside your portfolio.
  • They can offer the dual benefits of solid investment returns and dividend income.

On the other hand, here are some potential drawbacks to consider with blend funds:

  • Growth stocks and blend funds that include them can be riskier than value stocks or value funds.
  • The value component of these funds is generally better suited to people who are investing for the long-term.
  • Some blend funds can carry steep expense ratios, which can diminish the value of your investment returns.

If you’re comfortable with the higher risk potential then a blend fund could be a good choice. But if you tend to be more conservative with your investments or you’re looking for something that can deliver returns in the near-term then you may want to look elsewhere.

Blend Fund vs. Balanced Fund

Balanced fund is a term that’s sometimes confused with blend fund, but they aren’t the same thing. The difference lies in what they invest in.

With a blend fund, you’re most often getting a mix of two different stock types: value and growth. But with balanced funds, the goal is creating a target asset mix between stocks and bonds. So for example, you might have a balanced fund that consistently maintains an asset allocation of 60% stocks and 40% bonds. Or it might have an asset mix of 80% stocks and 20% bonds if it’s a more aggressive fund.

While they sound similar, it’s important to recognize that blend funds and balanced funds have unique investment objectives and approaches. Balanced funds can also provide growth and income, but they do it in a different way from blend funds. They can also differ when it comes to their risk profile and expense ratios.

You could invest in both, but if you decide to do so, be sure to check each fund’s underlying holdings first. If you have two funds that own many of the same stocks you could end up overexposing yourself to risk without realizing it.

The Bottom Line

Newspaper listing of mutual fundsInvesting in a blend fund might be something to consider if you’re interested in holding both growth and value stocks in one convenient package. Buying one fund can be a simpler and more cost-effective way to gain exposure to both sides of the market. Just remember to keep fund costs and risk levels in mind to find a blend fund that fits your needs. Also, keep in mind that there’s a difference between blend funds and balanced funds.

Tips for Investing

  • Consider talking to a financial advisor about whether blend funds are a good option for growing your portfolio. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool can help. This free online tool helps you connect with professional advisors in your local area in minutes. If you’re ready, get started now.
  • One way to sort through your investment options is with an asset allocation calculator. It helps identify your risk profile and then suggest a mix of securities that fit your risk profile and your financial objectives.

Photo credit: ©iStock.com/anyaberkut, ©iStock.com/fizkes, ©iStock.com/blackwaterimages

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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