As both "blend"and "balanced" describe the particular asset mix of mutual funds, determining the exact distinctions between the two can be difficult. 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 the following:
1) The future appreciation in share price of value stocks - Portfolio managers consider these types of shares undervalued and expect a future appreciation in stock price once the market realizes these stocks' true value. (For a closer look at value investing, check out this tutorial.)
2) The appreciation in share price of growth stocks - Portfolio managers believe these stocks have a large potential for rapid growth in earnings. (For a look at this style of stock picking strategy, check out this tutorial.)
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. 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. For more on re-balancing a portfolio, see the article "Maintaining Your Mutual Fund Equilibrium." 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.