What is a blend fund?

Think of an Indian thali. Why do we love them? Because it’s nice to mix things up sometimes. Blend funds are the equivalent of a thali meal. They give you the best of both worlds as far as value stocks and growth stocks go.

What is a blend fund?

A blend fund is an equity investment option in mutual funds. It combines value stocks and growth stocks to give better returns. By doing this, blend funds also allow for portfolio diversification. As a result, they come with better stability and growth prospects.

Blend funds are a type of hybrid fund. You can read more about hybrid funds here.

How do blend funds work?

We now know that, by definition, blend funds are a combination of growth stocks and value stocks. In this section, we break down each of those terms a little more so you can understand how blend funds work better.

• Growth stocks: These stocks, also known as earning stocks, are expected to grow faster than most others on an exchange. They are the stocks of companies that show potential for growth in earnings and capital gains. The growth fund stocks rarely pay dividends. But they look expensive and often trade at a high price-to-earnings ratio.
• Value stocks: Value stocks have a low share price-to-earnings ratio. These are usually undervalued stocks. People, therefore, invest in them on the basis of their fundamentals. They often pay regular dividends.

The value stocks typically underperform when the growth stocks are doing better enough. So putting these assets into a portfolio may help it perform better. However, remember, one cannot be absolutely certain.

Fund managers generally select blend funds and classify them in terms of market capitalization data. So investors can choose between small-cap, mid-cap, and large-cap company stocks. It helps to try to understand the allocation determinants of the fund. Because some blend funds may focus on capital appreciation, growth, and income. But there will be many others that do not.

How does a blend fund differ from a balanced fund?

A balanced fund is typically a type of asset allocation fund. They comprise a mix of fixed-income instruments with equities. The main aim of balanced funds is to ensure growth in value along with a source of income.

Blend funds, on the other hand, only contain stocks. They don’t include fixed-income securities. They are a type of equity. The goal is value appreciation by means of capital gains from the growth portion and deriving income from the value portion.

With balanced funds, the fund manager will either re-balance the portfolio every year to get the proportions to return to its original state or restructure the portfolio in line with market conditions. The choice will depend on the portfolio management style. This does not occur with blend funds.

Blend fund types

Blended fund investments come in two highly effective types. This is where you can learn all about them.

1. Small blend fund investments

A small blend fund investment focuses on small companies where neither growth nor value is predominant over the other. These companies have a smaller market capitalization and are usually in the bottom 10% of the market.

2. Large blend fund investments

The large blend fund investment focuses on companies that come with a higher value, larger size, and better growth rate and price points. Here too, neither growth nor value predominates. These companies are among the top 70% in terms of market capitalization. Investing across a wide range of industries, these investments offer returns of the S&P 500 variety.

Factors to consider when investing in blend funds

Blend funds bring yet another option for investors. However, identifying blend funds may be difficult as they are not labeled as such, and they come with varying investment strategies. So, if an investor would like to go for this type of fund, it’s best to look for an investment advisor.

If you do find one, you must consider some key factors before investing.

First things first, look at the value, size (preferably low), quality, momentum, and yield process. However, you would do well to also keep your investment objectives, beliefs, and constraints in mind.

That said, two types of investors do not do well with blend funds: conservative ones and those looking at short-term investments. Because blend funds allocate 100% of the money to stocks, and for the best results, they require a long-term commitment.

Advantages and disadvantages of blend funds

Blend funds offer the following advantages:

• Stability: As it involves investments in multiple companies, it helps with diversifying your portfolio. Plus, the value component ensures there is a greater chance that you will have a steady cash flow and a stable income.
• Liquidity: The value component ensures you have some liquidity.
• Lower risk: Large companies hold a relatively larger stock market share, reducing the risk. The risk factor associated with small and mid-cap companies can be bypassed if one chooses companies with a larger market cap. That’s possible because of blend funds’ design.

Some of the key disadvantages of blend funds are:

• Lower returns: While large caps have their advantages, they often offer lower returns than mid-cap and small-cap funds.
• Fewer ownership powers: Investors have fewer ownership powers and decision power than the fund manager. That can be a drawback if you like being in control.

Blend funds provide investors with more advantages for growth and value. They generally let you invest on the basis of the market capitalization of stocks. They do come with a lot of perks, but there are always some disadvantages, too. So make sure you do your research and seek professional advice if necessary.

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