One of the best ways rising graduates can prepare themselves for future business leadership roles is by learning the core tenets guiding financial decisions. Namely, how to generate a satisfactory return on investment (ROI) and minimize risk through diversification. These concepts often trickle down to two words: index funds. In today’s world, trillions of dollars are allocated to index funds, making them a pivotal investment tool for both retail and institutional investors.
The best way to learn about diversified investing through index funds is by obtaining a Master of Business Administration. Specialized programs, like the online Master of Business Administration (MBA) with an emphasis in Finance from the University of West Florida (UWF), teach students the intricacies of using index funds strategically to achieve investment goals.
Understanding the Basics of Index Funds
An index fund is an investment vehicle that tracks the performance of a certain market sector or range of assets. Many different types of index funds help investors achieve a wide range of goals, including generating income, tracking emerging industries, and diversifying.
Index funds offer a low-cost way for retail and institutional investors to diversify their portfolios while earning a consistent return. For example, instead of buying individual stocks (which can be risky), investors can purchase shares of an index fund that tracks the S&P 500 Index, a fund comprised of 500 leading companies. This allows investors to instantly diversify their portfolio and mirror the aggregate return of these 500 companies. Index funds are also known for having very low management costs when compared to funds that try to outperform the market, which are known as actively managed funds. The low fees associated with index funds help investors maximize their returns over time.
The downside to investing in index funds is that these funds do not take defensive positions. If the market declines, index fund investors are usually forced to either sell their positions or wait for the market to turn around. Another downside of index funds is that they usually do not offer any potential to outperform the index they track, limiting potential return for the investor. For example, an index fund tracking the S&P 500 will only ever mirror the S&P 500‘s return – it would never return 20% if the S&P only returned 10%.
The Importance of a Diversified Portfolio
Index funds are vital to corporate or institutional investors, largely due to their ability to easily diversify large portfolios across sectors, markets and assets. Institutional investors – such as pension funds, endowments or insurance companies – typically invest money on behalf of their company, customers or employees. This can often amount to millions or even billions of dollars.
Managing this amount of money is a very high-pressure position, as losing it has serious ramifications. For example, mismanaging a pension fund and suffering major losses could force hundreds or thousands of people to delay their retirement. As such, institutional investors usually place strong emphasis on protecting their capital, a goal often achieved at least in part through buying index funds.
Why Pursue an MBA in Finance
Earning a corporate or institutional investment position can be exceedingly difficult, as it carries an immense responsibility. Employers interviewing for these positions usually only interview candidates with a deep understanding of diversification, risk management and portfolio management best practices. This is partly why many aspiring business or finance leaders obtain a Master of Business Administration. This all-encompassing advanced degree communicates to future employers that they‘ve got the knowledge base and skill set required to excel in this high-pressure industry.
Specialized MBA programs, like UWF‘s online MBA with an emphasis in Finance, prepare students for success by teaching them the core foundations necessary to succeed in business. When it comes to investing, students at UWF can expect to learn concepts like:
- Financial Management: Students learn the advanced treatment of investment and financing decisions of firms, emphasizing current theory and practice.
- Investments: Students learn theoretical concepts related to securities analysis and portfolio management.
Students graduate from this program with an in-depth knowledge of many financial topics, as well as experience that’s directly transferable to the workplace. This program can also be completed in as few as 16 months.
Learn more about the University of West Florida’s online MBA with an emphasis in Finance program.
