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What are blended mutual funds?

As the name suggests, these mutual funds combine two of the most fruitful investment strategies in the world of finance – value and growth – into one.

In this article, we’re going to explore what value and growth investing is, how these funds blend them together, and which investors could really benefit from buying into these mutual funds.

What is value investing?

Value investing is about unearthing valuable businesses that are currently trading at below their intrinsic value. It focuses on identifying companies with strong fundamentals and significant growth potential that aren’t being fairly valued by the market.

The core principle lies in acquiring assets for less than they are inherently worth. 

Imagine purchasing a prime piece of real estate at a fraction of its market value due to temporary market conditions. Value investors aim to replicate this principle with publicly traded companies.

Warren Buffett is arguably the most successful value investor of all time. He famously acquired undervalued companies like GEICO, Coca-Cola, and Apple based on their strong fundamentals, holding them for the long term and unlocking substantial returns as their true value became recognized by the market.

What is growth investing?

Growth investing, on the other hand, focuses on identifying companies with the potential for rapid and sustainable growth, often at the expense of immediate profitability.

These companies typically exhibit innovative products, strong market positions in high-growth industries, and exceptional management teams.

Imagine identifying a company at the forefront of a disruptive technology with the potential to revolutionise an entire industry. Growth investors would invest in this company aiming to capitalise on this potential by investing early and reaping significant rewards if the company successfully executes its growth strategy.

One prominent example of a successful growth investor is Cathie Wood, founder of ARK Invest. She identified the disruptive potential of companies in areas like artificial intelligence, genomics, and fintech, investing in them at early stages. While her approach has experienced periods of volatility, it also demonstrates the potential for significant rewards when identifying high-growth companies early in their development cycle.

Combining value and growth in a blend fund

If both of these sound great to you, blend funds are a dream. They raise money from investors who are willing to invest in both growth and value but don’t have the time or resources to do so.

By investing in a fund led by a fund manager, value and growth investing (and reaping the returns thereof) become much easier. Blend funds, hence, primarily aim to achieve a balance between the growth potential of growth stocks and the stability and dividend income of value stocks.

Key features of a value and growth blend fund

Here are some characteristics of a blend fund:

  • They could be actively or passively managed – Blend funds can be actively managed, where a fund manager makes investment decisions based on their research, experience, and market analysis, or passively managed, where the fund tracks a specific index that blends growth and value stocks.
  • Diversification – By their very principle of investing in two different types of companies, they offer diversification not only by industry but also by economy, potentially reducing overall portfolio risk.
  • Passive income and capital appreciation – Some blend funds also pay out dividends received by value buys, which can act as passive return streams for income investors.
  • Suitable for the long-term horizon – Both value and growth stocks, by principle, require time to mature. Value companies have to wait for market participants to value them accurately and fairly, and growth stocks have to have proof of concept and profitability to grow.

Frequently Asked Questions

Are blend funds suitable for beginner investors?

Blend funds can be a good choice for beginner investors due to their built-in diversification and balanced approach. However, thorough research and understanding of your risk tolerance are crucial before investing because sometimes, these funds can take a long time to return expected results.

How do blend funds compare to asset allocation funds?

While these are both similar, blend funds primarily focus on equities with a blend of growth and value styles, while asset allocation funds may invest in a broader range of asset classes like bonds and real estate along with equities.

Can I lose money in a blended mutual fund?

Like any investment, blended mutual funds carry the risk of losing money due to market fluctuations. Diversification can help mitigate risk, but it doesn’t guarantee complete protection from losses.

Do blend funds offer dividend reinvestment options?

Many blend funds offer dividend reinvestment options, allowing you to reinvest the dividends you earn from value stocks into the fund again. This strategy could potentially accelerate your long-term returns through increased compounding.

How often should I rebalance a blended mutual fund?

It’s crucial to periodically review the asset allocation of your blend fund, especially for actively managed funds. If the allocation deviates significantly from your desired blend due to market movements, consider rebalancing your portfolio or shifting to a different fund to maintain your targeted risk profile.

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