Even relatively simple investing can lead to a flurry of questions about how mutual funds work, how to buy them and what their tax implications are. Since the tax code is constantly changing, there will always be a need for financially literate business leaders to advise others on the best practices for mutual funds, as well as other investment tools.
For those looking to enter the investment field, obtaining an online Master of Business Administration (MBA) with a concentration in Finance program can be an ideal path to becoming a competitive job candidate. Graduates with this degree have the necessary skills to pursue various roles and understand the nuances of the investing world with expertise.
Active and Passive Mutual Funds
A mutual fund is an investment vehicle consisting of a portfolio of stocks, bonds or other securities. Professional money managers oversee these funds — individual investors have no control over the investment decisions. For investors, mutual funds offer a way to easily access a diversified mix of investments such as stocks and bonds. There are two common types of mutual funds: actively and passively managed.
In an actively managed mutual fund, the fund manager routinely buys and sells different securities in hopes of earning a higher return. If the fund manager is successful in generating a higher return then they will subsequently generate more capital gains. If you own a share of the mutual fund, then these capital gains will be passed on to you. Conversely, passively managed funds (like index funds) are typically more tax-efficient than actively managed funds because the fund manager holds positions longer.
Tax Strategies for Mutual Funds
When it comes to investing, a famous saying goes, “It’s not about how much you earn, it’s about how much you keep.” In other words, minimizing your tax burden can often be as important as earning a high return on your money. When buying mutual funds, a few factors must be considered before investing in a fund. According to Investopedia, these are the three factors that will dictate your mutual fund’s tax efficiency:
- The frequency of trading activity
- The longevity of each investment in the portfolio
- The types of distributions your fund makes
Speaking of distributions, mutual funds can return earnings to investors in two ways: dividends or capital gains distributions. With dividends, your fund will send you a payment when it receives a payoff from a dividend-bearing stock or interest-bearing bond. Similarly, your fund will distribute capital gains when the fund manager sells an asset and takes a profit. However, not all capital gains are taxed at the same rate.
What Is Tax Loss Harvesting?
Tax-loss harvesting is another tax minimization strategy for investors. This strategy allows investors to sell stocks that are down, replace them with similar investments and use the losses to offset realized gains from other winning stocks. This action helps reduce your tax bill while also keeping more of your money invested. Even if you are only saving a small amount in taxes each year, using this strategy can have a compounding effect that adds up over time.
Again, strategies like tax-loss harvesting can be difficult for retail investors to complete on their own — especially if investing is a part-time hobby for them. If you plan on pursuing a career in the investment industry, it is likely worth obtaining an advanced degree to learn the field’s best practices.
Separating Yourself in the Financial Field
Although it depends on the niche, the finance field relies heavily on certifications and academic achievements to sort out top candidates. Hiring managers in the finance industry are much more likely to choose a job applicant with an MBA over other applicants, as the degree signals that the candidate has a thorough understanding of all required topics, plus an outstanding work ethic.
Additionally, many MBA programs offer a specialization in finance, which can make you even more attractive to employers. This is because these programs often have specialized courses that will prepare you for real-world issues. For example, St. Cloud State University’s online MBA in Finance program offers a course on Investments and Security Analysis. This course teaches students the basics of securities, financial markets, investment in mutual funds and other investment companies, modern portfolio theory and diversification strategy.
With an advanced business degree in finance, professionals have the necessary foundational skills to succeed in tax-efficient investing and be a successful job candidate in the field.
Learn more about St. Cloud State University’s online MBA with a concentration in Finance program.
