Mutual funds pool investor money to buy a variety of investments that adhere to the fund's investment style. Funds are identified by the mix of securities they hold, the type of returns they seek, and their investment objectives. The terms "blend" and "balanced" both describe particular types of mutual funds. Determining the exact distinctions between the two can be difficult.
Understanding Blend Funds
Blend funds, which contain only stocks and no fixed-income securities, are a type of equity fund that holds a mix of both growth stock and value stock. The goal of these funds is to appreciate in value by means of capital gains achieved through share price appreciation.
The fund manager might invest in shares of undervalued securities. Portfolio managers expect a future appreciation in the security's price once the market realizes its true value. Fund managers also invest in growth stocks, which have a large potential for rapid earnings growth.
Blend funds can also be further categorized according to their specialization in small, medium, or large-cap stocks. There is a higher risk associated with blend funds as their primary investment is in the stock market.
Understanding Balanced Funds
Balanced funds are a type of asset allocation fund that contains a mix of fixed-income instruments and equities. The asset mix is usually constrained to fixed proportions. For example, a fund could have an asset mix consisting of 40% equities, 50% bonds, and 10% money market instruments. The goal of balanced funds is to achieve both growth in value and consistent income.
Depending on the type of portfolio management, balanced funds will be either re-balanced every year in order to return the proportions back to their original state or restructured to favor market conditions.
As bond and equity markets do not move together, balanced funds use diversification to allow individuals to participate in market gains without the substantial risks involved with pure equity funds. If the stock market is tanking, odds are the bond market will remain relatively stable or maintain an upward trend. Thus, if the equity portion of an investor's balanced fund is performing poorly, the fixed-income portion will continue to perform well or maintain its value. The balanced fund, therefore, does not lose as much value as a blend fund when the equity markets are performing poorly.
Advisor Insight
Donald P. Gould
Gould Asset Management, Claremont, CA
"Blend" generally refers to a combination of different investments within the same asset class. For example, an all-stock mutual fund, such as an S&P 500 index fund may be considered a "large blend" fund because it holds a mix of large cap growth and value stocks.
"Balanced" generally refers to a combination of different asset classes within a single fund. A typical example would be a mutual fund that holds 60% stocks and 40% bonds. While there is no specific allocation percentage at which a fund ceases to be "balanced," it is uncommon to see more than 75% of the holdings devoted to a single asset class in a balanced fund.
To sum up: A blend fund is composed of multiple types of securities from a single asset class. A balanced fund is composed of multiple asset classes.
