One way to diversify your portfolio is by investing in a blended mutual fund, or blend fund. This type of fund contains both growth and value stocks, and may specialize in large, medium or small companies. Depending on your financial goals and risk tolerance, such a fund could play an important role in your portfolio. Knowing the difference between growth and value stocks will give you a better idea of whether a blend fund is right for you.
Growth stocks are shares in companies whose earnings, and thus stock prices, are expected to grow faster than the overall stock market. These stocks tend to pay little or no dividends because such companies usually reinvest their earnings in research and development.
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Value stocks are shares that sell at relatively low prices compared with a company's earnings, and thus are considered undervalued by the market. These stocks often pay regular dividends and can appreciate rapidly when investors see their true worth.
Hedging Your Bets
When growth stocks perform well, value stocks tend to lag. Owning both in a blend mutual fund means that you don't have to try to guess which asset type will perform better over time. No matter which way the market goes, you theoretically could make money from at least one of them.
Depending on their specific holdings, some blend funds may be less risky than growth funds and more risky than value funds. However, all blend funds are more diversified than mutual funds that invest only in growth or value stocks. Generally, investing in both types of stock tends to reduce volatility, or wide swings in a fund's share price. This can decrease the chance that you will lose a large amount of money over the long term.
Blend vs. Balanced Funds
Don't confuse blend funds with balanced funds. While blend funds contain only stocks, balanced funds contain a mix of stocks and bonds or other fixed-income investments. Because of this, blend funds tend to be more risky than balanced funds.
Before you invest, look at how much money a blend fund has in growth stocks compared with value stocks. You may be able to create a ratio that is better suited for your portfolio by choosing a separate fund for each asset type. This could help you put more emphasis on value stocks, for example. Online tools can help you see how much money a particular mutual fund devotes to each type of stock.