When you buy a mutual fund, you're turning over your money to a professional money manager to determine what investments to buy. To help investors choose which mutual fund they want to buy, funds are required to issue prospectuses, which outline the investment philosophy and restrictions of the fund. A large blend fund will typically invest most or all of its assets in huge, well-known corporations that exhibit either growth or value characteristics.
The two broad categories of stock investing are growth and value. Growth stocks are expected to increase their earnings at a faster rate than other companies, which could translate into a rapid rise in price. Value companies are considered inexpensive relative to others in the same industry, based on metrics such as sales, earnings growth and book value. As stock market "bargains," value stocks may have more potential to appreciate than similar companies that are considered overvalued. A large blend mutual fund will buy big companies from both the growth and value categories, thereby "blending" the overall portfolio.
Large blend funds can side-step a lot of the risk that may be present in other types of mutual funds. Larger companies in general are more stable than smaller, rapidly growing ones, and their stock prices tend to fluctuate less. There is also less likelihood of larger, more established companies going bankrupt. Owning a blend of growth and value stocks reduces your exposure to any one particular area of the market and can smooth out your longer-term returns. If growth stocks are going through a bad period in the market, value stocks often perform better, and vice versa.
Though large blend funds can reduce your overall market risk, you're still investing in stocks, and stocks by definition carry risk. A large blend fund often trades in a similar manner as the S&P 500 Index, which is a popular proxy for the market as a whole. While good years can produce tremendous returns, stocks often have double-digit percentage declines. Large blend funds may spread out your risk, but by investing in a large number of stocks, they are likely to own at least some stocks that have significant declines. Even the best large blend funds can't completely side-step market risk.
Even with no-load mutual funds, investment management doesn't come for free. Large blend funds can carry any number of expenses, and those fees will drag down your overall return. Traditional funds carry either front-end or back-end sales charges, in some cases as high as 5 percent or more. All funds, including no-load funds, charge annual expenses. The costs of running and maintaining an actively managed fund can run investors 2 percent or more per year. As an investor, you'll have to decide whether or not your large blend fund offers superior performance to justify the added expense. Index funds, which attempt to mimic the performance of an index such as the S&P 500, can cost as little as 0.3 percent or less per year.
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