financial

Reviewed by Khadija Khartit

Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian mutual funds pool the investments of many shareholders and invest them in a variety of securities depending on the goals of the fund. Also like U.S. funds, there is a wide range of different fund types available for purchase depending on the needs and risk tolerance of any given investor.

Mutual funds are a popular investment option in India because, like American funds, they offer automatic diversification, liquidity, and professional management.

Key Takeaways

• Like mutual funds in the U.S., Indian mutual funds pool the investments of many shareholders and invest them in a variety of securities depending on the goals of the fund, and there is a wide range of different fund types available for purchase depending on the needs and risk tolerance of any given investor.
• Mutual funds are a popular investment option in India because, like American funds, they offer automatic diversification, liquidity, and professional management.
• Any type of mutual fund that exists in the U.S. is mirrored in some way in the Indian market.
• The Securities and Exchange Board of India (SEBI) regulates mutual funds in India.
• The mutual fund sponsor is responsible for applying for registry with the SEBI and, after approval, must form a trust to hold the assets of the fund, appoint a board of trustees or trust company, and choose an asset management company.

An Overview of Indian Mutual Funds

Any type of mutual fund that exists in the U.S. is mirrored in some way in the Indian market. There are mutual funds that invest in equity or stocks and are managed to achieve a range of goals. Some equity mutual funds are designed to generate long-term capital gains through growth or value investing strategies, like the Birla SL Frontline Equity Fund, while others are focused on generating dividend income for shareholders. Some combine the two, such as the popular ICICI Prudential Equity & Debt Fund.

Indian mutual funds may also invest in bonds and other debt securities with the goal of generating regular interest income. Indian debt funds invest in government or corporate debt instruments and money market securities just like American funds.

There are also Indian balanced funds that invest in both equity and debt instruments to create portfolios that offer a degree of stability without completely ignoring the potential for big gains in the stock market. A good example is the DSP Equity Opportunities Fund.

Just like in the American market, the Indian market offers mutual funds that specialize in certain sectors, only invest in government or inflation-protected debt, track a given index, or are designed to maximize tax efficiency.

Regulation

Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI). Indian mutual funds are subject to stringent requirements about who is eligible to start a fund, how the fund is managed and administrated, and how much capital a fund must have on hand.

To start a mutual fund, for example, the fund sponsor must have been in the financial industry for at least five years and have maintained positive net worth for the five years immediately preceding registry. The SEBI regulations also include a minimum startup capital requirement of 500 million rupees for open-ended debt funds and 200 million rupees for closed-ended funds. In addition, Indian mutual funds are only allowed to borrow up to 20% of their value for a term not to exceed six months to meet short-term liquidity requirements.

Mutual Fund Management Structure

The mutual fund sponsor—either an individual, group of individuals, or corporate body—is responsible for applying for registry with the SEBI. Once approved, the sponsor must form a trust to hold the assets of the fund, appoint a board of trustees or trust company, and choose an asset management company.

The board of trustees or trust company is responsible for overseeing the mutual fund and ensuring it operates with the best interests of its shareholders in mind. The asset management company is the entity in charge of managing the fund’s portfolio and communicating with shareholders.

If the asset manager wishes to expand the product line, introduce a new scheme, or change an existing scheme, they must first obtain approval from the board of trustees or trust company. In addition, the trustees must appoint a custodian and depository participant who is responsible for keeping track of asset-trading activity and safeguarding both the tangible and intangible assets of the fund.

What Is a Mutual Fund?

A mutual fund is an investment vehicle that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities (according to the fund’s stated strategy). It allows individual investors to gain exposure to a professionally managed portfolio traded on an exchange and potentially benefit from economies of scale, while spreading risk across multiple investments.

Who Regulates Mutual Funds in India?

Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI). The SEBI is the leading regulator of securities markets in India and is the counterpart of the Securities and Exchange Commission (SEC) in the U.S.

Is There a Minimum Startup Capital Requirement for Mutual Funds in India?

Yes. Securities and Exchange Board of India (SEBI) regulations include a minimum startup capital requirement of 500 million rupees for open-ended debt funds and 200 million rupees for closed-ended funds. The rupee is the national currency of India. Its currency code is INR, and the rupee currency symbol is ₹.

The Bottom Line

Like mutual funds in the United States, mutual funds in India pool the investments of many shareholders and invest them in a variety of securities, depending on the goals of the fund. Also like U.S. funds, there is a wide range of different Indian mutual fund types available for purchase, depending on the needs and risk tolerance of the investor.

Mutual funds in India offer automatic diversification, liquidity, and professional management, like their American counterpart.

Reviewed by Ebony Howard
Fact checked by Vikki Velasquez

British trust law has a long, fascinating history dating back to the feudal times of the 12th century and the Statute of Uses adopted during the reign of Henry VIII in the 16th century. Back then, trust and equity rules were established as a parallel justice system to address inequity of common law around property disputes (and to appease disgruntled claimants).

Initially, trust funds were mostly utilized for the management of “will monies” and to create family settlements. Today, “trust” has evolved into an umbrella term for a variety of financial frameworks that allow citizens to protect assets, distribute earnings, and manage wealth both for the present day and for future generations. Although traditionally associated with millionaires and magnates, trusts can benefit middle-class families as well.

Key Takeaways

• Trusts are basically the same in every country, but individual quirks in the U.K. system mean you need to go through the trust line by line with a professional.
• A trust is a legal arrangement that allows a third party to hold assets for a beneficiary.
• Trusts are not only for the wealthy.

What Is a Trust Fund?

In principle, a trust is a very simple concept. It’s a private legal arrangement in which the ownership of someone’s assets (which might include stock shares, cash, real estate, or even artworks) is transferred to a private fund, and held or managed by an individual (or group of individuals) for the benefit of the trust members.

The person providing the assets is generally referred to as the settlor. Those appointed to look after the assets are known as trustees, and those who receive disbursements from the trust are the beneficiaries.

Important

Once assigned to the trust, in most cases, assets are no longer deemed personal possessions of the settlors and are thus safeguarded from creditors (even in cases of bankruptcy), financial setbacks, family disagreements, and lawsuits.

Trusts are a widely used safe haven arrangement for family and business assets.

Why Create a Trust?

Trusts serve a variety of needs, and the reasons for establishing them are seemingly endless. The most common include:

• To control and protect family assets
• Estate and inheritance planning
• When someone is too young or incapacitated to handle their own financial affairs
• To protect spendthrifts against their own lack of control
• For management and distribution of pension or retirement funds during the term of an individual’s employment

What Types of Trusts Are There?

Since trusts function as multipurpose legal tools, they take many forms. The United Kingdom recognizes numerous trust arrangements (each with its own specific procedures and regulations) that generally fall into one of the following categories.

Bare Trusts

Also known as a simple trust, property or assets in this form are held in the name of a trustee who has no discretion over what income is paid to the beneficiary and has no active duties to perform. The beneficiary has the absolute right to all of the capital and income of the trust at any time—if they are 18 or older (in England and Wales), or 16 or older (in Scotland).

Bare trusts are often utilized as a vehicle through which assets are passed to young people. Trustees simply manage the assets until the beneficiary is old enough to handle that responsibility, which means assets set aside by the settlor will always go directly to the intended beneficiary.

Interest in Possession Trusts

This structure provides an individual with a “present right to the present enjoyment” of something, so the trustee must pass on all trust income to the beneficiary as it arises (less any expenses and tax). This type of trust can give the “interest in possession” to a beneficiary for a fixed period, an indefinite period, or most frequently, for the rest of the beneficiary’s life.

In a “life interest” trust, the interest in possession ends when the income beneficiary (known as the “life tenant”) dies, relocates, or remarries.

Discretionary Trusts

As the name implies, this instrument provides the trustee with discretion over distributions from the trust. Discretion must be exercised in accordance with the terms of the trust deed. However, it is entirely up to the trustees to decide as to the timing, size, and nature of the distributions, and even, in some cases, which of the potential beneficiaries is to benefit.

The assets are said to be “held in trust” for the beneficiaries to one day decide what to do with those assets. A discretionary trust is a very flexible form of trust commonly used to keep wealth within families while allowing them some flexibility to make decisions about where the assets go.

Accumulation and Maintenance Trusts

This version allows the trustees to augment the trust’s capital and income. Trustees of an accumulation and maintenance trust are given the power to “accumulate” the trust’s assets (through savings and investments), until a certain date, at which time the beneficiary is entitled to the property of the trust, or to some of the income arising from that property. When the beneficiary reaches the age of 18 (at least, but no older than 25), they become entitled to the full income generated by the trust.

Mixed Trusts

This form contains different types of trusts within one structure. Some assets may be set aside in an interest in possession trust, while others may be treated in a discretionary trust manner. Mixed trusts are often created to benefit sibling beneficiaries who reach inheritance age at different times.

How Do I Create a Trust?

While simple in theory, trusts can become a web of complexity if they’re to operate properly. A solicitor is needed to draw up a trust because the legal wording must be precise. The process can be costly (around £1,000 or more), depending upon the extent of the advice required. By being prepared before you start in the consultation process, however, you can considerably reduce professional advice time and associated costs, irrespective of trust type.

Step 1: Decide Upon the Assets

You will need to list the items and value of those items that have been allocated, or will otherwise be acquired, at trust inception.

Step 2: Appoint Trustee(s)

Select an individual or management company you trust (banks are often used), because the trustee will bear significant legal authority with control over trust assets.

Step 3: Determine the Beneficiaries

Compile a list of people or entities that will be entitled to receive benefits, and include the percentage of those benefits to which each beneficiary is entitled.

Step 4: Outline the Terms

A trust is generally created by way of a deed. A trust deed is a legal document prescribing the rules that govern your fund and the powers of the trustee. It includes the following:

• The fund’s objectives
• Original trust assets
• The beneficiaries
• How benefits are to be paid (either via a lump sum or an income stream)
• How the trust may be settled (that is, terminated)
• The rules for the operation of the trust bank account

Although the deed itself should be crafted by someone with adequate specialized legal, tax, and financial knowledge, you should decide all of these aspects and sketch them out for the professional preparer.

The trust deed will specify the following:

• The identities of the trustees and beneficiaries
• Which assets are being passed into the trust for management by the trustee
• How the money or property is to be managed
• The permitted use of the money
• Who receives the money or property when the trust is terminated

Who Can Set up a Trust Fund?

You don’t need to be wealthy to start a trust fund. As long as you have assets (not necessarily high-value assets), savings, property, or business shares, you can set up a trust fund. Be aware, though, of the costs associated with setting up a trust fund.

How Much Does It Cost to Set up a Trust in the U.K.?

Creating a simple trust typically costs anywhere from £1,000 to £1,500, depending on how much initial legal advice you need and how long it takes your solicitor to draft the wording. If you have a complex collection of assets, including foreign assets, as well as business interests, the cost can be as high as £10,000.

Are Trust Funds Taxed?

Yes. Different rates of income tax, capital gains tax, and inheritance tax are applied to trust funds depending on the type of trust and trust income received.

The Bottom Line

Given their practicality, flexibility, and many financial benefits, trust funds have become an incredibly popular way of structuring financial affairs. However, the complex nature of many trusts requires a crystal-clear understanding of the legal relationships and obligations involved.

If you’d like to set up a trust, you can always start with your own solicitor, accountant, or tax advisor. Law societies also maintain searchable databases to help you find a qualified solicitor in your area.

Reviewed by JeFreda R. Brown

Contrary to what we are led to believe, investors can only spend compound returns, not average returns. Nevertheless, the average returns are so often mentioned by those seeking to promote an investment approach. This practice can often mislead investors who don’t understand how money is made and lost over a period of time, due to compounding, in markets that move up in one year and down in the next.

Two factors can have a significant impact on the realized returns experienced by investors: the dispersion of returns and the impact of negative returns. Read on to discover the impact these factors could have on your portfolio, and how you can use this knowledge to gain higher compound returns and avoid the negative side of compounding.

Key Takeaways

• Compound interest has been referred to by economists as a financial “miracle,” creating exponential returns over time as new interest is earned on both principal and earned interest.
• In the real world, however, many asset classes experience down years, which can also amplify the negative impact of losses over time.
• Adapting to bear markets or rising volatility is key to preserving returns and taking advantage of compounding in bull markets while avoiding its potential dark side.

Back to Basics

First, let’s review the mathematics used to calculate simple and compound averages. The simple return is the mathematical average of a set of numbers. The compound return is a geometric mean, or the single percentage, usually annual, that provides the cumulative effect of a series of returns. The compound return is the mathematical calculation describing the ability of an asset to generate earnings (or losses) that are then reinvested and generate their own earnings (or losses).

Let’s say you invested $1,000 in the Dow Jones Industrial Average (DJIA) in 1900. The average annual return from 1900 to 2005 for the DJIA is 7.3%. Using the annual average of 7.3%, an investor has the illusion that $1,000 invested in 1900 would become $1,752,147 at the end of 2005 because $1,000 compounded annually at 7.3% yields $1,752,147 by the end of 2005.

However, the DJIA was 66.08 at the beginning of 1900 and ended at 10,717.50 in 2005. This results in a compound average of 4.92%. In the market, you only receive compound returns, so $1,000 invested at the beginning of 1900 in the DJIA would result in only $162,547 by the end of 2005. (To keep things simple and relevant to the discussion, dividends, transaction costs, and taxes have been excluded.)

What happened? There are two factors that contribute to the lower results from compounding: dispersion of returns around the average and the impact of negative numbers on compounding.

Dispersion of Returns

As the returns in a series of numbers become more dispersed from the average, the compound return declines. The greater the volatility of returns, the greater the drop in the compound return. Some examples will help to demonstrate this. Figure 1 shows five examples of how the dispersion of returns impacts the compound rate.

The first three examples show positive or, at worst, 0% annual returns. Notice how in each case, while the simple average is 10%, the compound average declines as the dispersion of returns widens. However, half of the time, the stock market moves up or down by 16% or more in a year. In the last two examples, there were losses in one of the years. Note that as the dispersion in returns grows wider, the compound return gets smaller, while the simple average remains the same.

This wide dispersion of returns is a significant contributor to the lower compound returns that investors actually receive.

Impact of Negative Returns

It is obvious that negative returns hurt the actual returns realized by investors. Negative returns also significantly impact the positive impact compounding can have on your total return. Again, some examples will demonstrate this problem.

In each of the examples in Figure 2, a loss is experienced in one year and the compound average return for the two years is negative. Of particular importance is the percent return required to break even after the loss. As the loss increases, the return required to break even grows significantly as a result of the negative effect of compounding.

Another way to think about the impact of negative returns on compounding is to answer this question: “What if you invested $1,000 and in the first year you earned 20%, and then lost 20% the following year?” If this up-and-down cycle continued for 20 years, it would create a situation that is not that different from what occurs in the market. How much would you have at the end of 20 years? The answer is a disappointing $664.83—not exactly something to brag about next time you’re at a party.

The impact of dispersion of returns and negative numbers can be deadly to your portfolio. So, how can an investor overcome the dark side of compounding and achieve superior results? Fortunately, there are techniques to make these negative factors work for you.

Overcoming the Dark Side of Compounding

Successful investors know that they must harness the positive power of compounding while overcoming its dark side. Like so many other strategies, this requires a disciplined approach and homework on the part of the investor.

As academic and empirical research has shown, some of a stock’s price movements are due to the general trend of the market. When you are on the right side of the trend, compounding works for you, in up markets as well as down markets. Therefore, the first step is to determine whether the market is in a secular (long-term or multiyear) bull or bear trend. Then, invest with the trend. This also holds true for shorter-term trends that take place within the secular trends.

During bull markets, it is fairly easy to do well—the common quip “a rising tide floats all boats” is correct. However, during a bear or flat market, different stocks will perform well at different times. In these environments, winning investors seek stocks that offer the best absolute returns in strong sectors. Investors must become good stock pickers rather than just investing in a diversified portfolio of stocks. In such cases, using the value approach to investing can have excellent results. It can also be useful to learn to short the market when the trend is down. Another strategy is to use bonds to build a ladder that provides a relatively safe return that can be used in a weak stock market environment.

During weak markets, when negative compounding can substantially harm your portfolio, it is even more important to employ proven capital management techniques. This starts with trailing stops to minimize losses and/or capture some profit from an investment.

Another important technique is to rebalance your portfolio more frequently. Rebalancing capitalizes on short-term cycles in the financial markets. By selling part or all of the top performers in one asset class or sector, it provides capital to invest in new promising opportunities. A variation of this strategy is to sell part of your position when you have a quick gain to capture some profit and move the stop to or above your entry price. In every case, the investor is actively seeking to offset the negative side of compounding or even work with it.

What Is Compounding?

Compounding is the process in which an asset’s earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will generate earnings from both its initial principal and the accumulated earnings from preceding periods.

What Are Compound Returns?

Compound returns are the rate of return, usually expressed as a percentage, that represents the cumulative effect that a series of gains or losses has on an original amount of capital over a period of time. Compound returns are usually expressed in annual terms, meaning that the percentage number that is reported represents the annualized rate at which capital has compounded over time.

What Is a Portfolio?

A portfolio is a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including closed-end funds and exchange-traded funds (ETFs). A portfolio may also contain assets such as real estate, art, and private investments. You may choose to hold and manage your portfolio yourself, or you may allow a money manager, financial advisor, or another finance professional to manage your portfolio.

The Bottom Line

Overcoming the dark side of compounding requires that an investor be an active manager of their portfolio. This requires learning the skills needed to recognize market trends, find appropriate investment opportunities, and employ proven capital management techniques. Overcoming the negative side of compounding and beating the market can be a very satisfying experience—after all, it’s your money that’s at stake.

What potential buyers need to know

Fact checked by Marcus Reeves
Reviewed by Julius Mansa

Sellers are required to disclose property information to the realtor and potential buyers based on state and local laws. A disclosure document details a property’s condition and what might negatively affect its value. Sellers who willfully conceal information can be sued and potentially convicted of a crime.

Disclosure laws are available from local and state real estate planning departments and vary by location. Buyers and sellers can also consult a real estate attorney for rules and information.

Key Takeaways

• Property sellers are required by law to disclose negative information about a property.
• The seller must follow local, state, and federal laws regarding disclosures.
• Selling a home “as is” may speed up the homebuying process, but it does not exempt sellers from disclosure requirements.

1. Deaths or Crimes

State rules vary on disclosing information about a death in a home. In Texas, deaths from natural causes, suicides, or accidents unrelated to the property do not have to be disclosed. However, sellers commonly disclose deaths related to the condition of the property or violent crimes.

Some states impose a duty to disclose a stigmatized home or apartment in which there has been a suicide or murder. Some states even go so far as to impose an affirmative duty on a seller if they know that their real estate is being haunted by the dead.”

Georgia doesn’t require the disclosure of homicide or suicide unless the seller is directly asked. However, sellers may want to err on the side of informing the buyer of a death on the property. Buyers will likely hear information or gossip from neighbors, so immediate disclosure is preemptive.

2. Neighborhood Nuisances

A nuisance is often a noise or odor from a source outside the property that could irritate the property’s occupants. North Carolina requires sellers to disclose noises, odors, smoke, or other nuisances from commercial, industrial, or military sources that affect the property.

Michigan requires sellers to disclose farms, farm operations, landfills, airports, shooting ranges, and other nuisances in the vicinity. These laws vary from state to state. Sellers and buyers should know what the law requires regarding neighborhood nuisance disclosures.

3. Hazards

If the home is at an increased risk of damage from a natural disaster or has known or potential environmental contamination, sellers may be required to disclose this information to the buyer. Texas law requires sellers to disclose the presence of hazardous or toxic waste, asbestos, urea-formaldehyde insulation, radon gas, lead-based paint, and previous use of the premises for the manufacture of methamphetamine. 

States may also require disclosing mine subsidence, underground pits, settlement, sliding, upheaval, or other earth-stability defects. California’s Natural Hazards Disclosure Act requires sellers to disclose whether the property is in a seismic hazard zone and subject to liquefaction or landslides after an earthquake. 

New York State’s Property Condition Disclosure Act requires sellers to notify buyers about whether:

• The property is located in a floodplain, wetland, or agricultural district
• Whether it has ever been a landfill site
• If there have ever been fuel-storage tanks above or below ground on the property
• If and where the structure contains asbestos
• If there is lead plumbing
• Whether the home has been tested for radon
• Whether any fuel, oil, hazardous, or toxic substance has been spilled or leaked on the property 

Important

The federal government mandates one disclosure: that lead-based paint may be present on any property constructed before 1978.

4. HOA Information

If the home is governed by a homeowners’ association (HOA), sellers must disclose this. Associations generally impose monthly fees and rules on their membership that a prospective buyer might not find acceptable. Buyers also need to know about the HOA’s financial health.

5. Repairs

What has a seller repaired, and why? Buyers need to know the home’s repair history such as electrical or plumbing work to have their home inspectors pay extra attention to problem areas.

Texas law requires sellers to disclose previous structural or roof repairs; landfill, settling, soil movement, or fault lines; and defects or malfunctions in walls, the roof, fences, the foundation, floors, sidewalks, or any other current or previous problems affecting the home’s structural integrity.

Warning

Selling a property “As Is” does not always exempt a seller from disclosures. 

6. Water Damage

Water in a home can damage personal possessions, undermine the home’s structure, and create a health hazard by causing mold growth. Sellers should disclose past or present leaks or water damage. Michigan requires sellers to disclose evidence of water in a basement or crawl space, roof leaks, significant damage from floods, the type of plumbing system, and any known plumbing problems.

Sellers commonly rely on a home inspector to find evidence of water and other damage within a home. Sometimes the seller may not be aware that previous damage occurred so they should check with the state’s laws regarding disclosing information they are unaware of.

7. Missing Items

Sometimes homebuyers don’t realize until the move-in day that their new homes are missing something they assumed would be there such as a light fixture or refrigerator.

Some states’ disclosure laws attempt to prevent this problem. Texas and Michigan require sellers to disclose whether the property comes with kitchen appliances, central air conditioning and heating, rain gutters, exhaust fans, and water heaters.

8. Permits and Pests

Buyers need to know if the home is in a special historic district because it will affect their ability to make repairs and alterations. Sellers may also be required to disclose problems with drainage or grading, zoning, pending litigation, changes made without permits, boundary disputes, and easements.

Texas law requires sellers to disclose active termites or other wood-destroying insects, termite or wood-rot damage in need of repair, previous termite damage, and previous termite treatment. Michigan and North Carolina law also require sellers to disclose any history of infestation. Sellers should consult their state’s laws to see if they must disclose information about pests.

What Is a Seller’s Disclosure Document?

A seller’s disclosure is a real estate document that provides details about a property’s condition and how it might negatively impact the value of the home. It is often required by law, though what it needs to contain can vary by state and locality. The seller should make all disclosures in writing, and both the buyer and seller should sign and date the document.

How Are Property “Flippers” Affected By Disclosure Rules?

Disclosure rules can affect anyone selling a home. Still, they’re especially likely to affect property flippers, who buy properties to upgrade them and resell them for a quick profit. Property flippers often deal with properties in poor condition.

What Happens if a Seller Lies on a Disclosure?

A seller often risks being fined, sued in court, or both. Lying on a seller’s disclosure is illegal, as the undisclosed hazards could cause serious damage to an unknowing buyer.

The Bottom Line

Even if a particular disclosure is not required in a seller’s locality, sellers who have information about their house might want to disclose it anyway. This avoids the expense and hassle of a potential lawsuit. Sellers who have any concerns about whether they’ve disclosed the property’s condition correctly should contact a real estate attorney in their state.

Investing in mutual funds is a popular way to grow wealth, thanks to their professional management and diversification benefits. While brokerage firms are commonly associated with mutual fund investments, many banks also offer these financial products. Because of their familiarity and integrated financial services, banks might seem like a natural choice for purchasing mutual funds.

This article considers the advantages and disadvantages of purchasing mutual funds through banks to help you decide if it’s the right choice for your investment needs.

Key Takeaways

• Banks offer convenience and potentially lower minimum investment requirements for mutual funds.
• Limited fund selection and potential conflicts of interest are key disadvantages of bank-sold mutual funds.
• Brokerage firms may provide a wider variety of funds and more specialized investment advice.
• Understanding fees and aligning investment goals are crucial before purchasing mutual funds from banks.
• Comparing banks and brokerage firms can help investors make informed decisions.

What Are Mutual Funds?

Mutual funds are managed investments that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. This investment vehicle offers professional management and diversification, making it an attractive option for both novice and experienced investors. These funds aim to achieve specific investment objectives, such as growth or replicating a broad market index. By investing in mutual funds, individuals can access a diversified portfolio without needing extensive knowledge of the financial markets.

When you invest in a mutual fund, you’re purchasing shares of the fund itself, not direct ownership of the underlying securities. Each share represents a proportional ownership of the fund’s holdings and any income they generate.

The fund’s structure is designed to provide several key benefits to investors. The portfolio manager invests the pooled money according to the fund’s stated investment objective, which might be growth, income, or a combination of both. As securities in the portfolio generate earnings—whether through dividends, interest, or capital gains—these are typically passed through to shareholders. Investors can choose to receive these distributions in cash or reinvest them to purchase additional fund shares.

Most mutual funds today are “open-ended” funds, meaning they continuously issue new shares to investors and redeem (buy back) existing shares from investors who wish to sell. The price per share, known as the Net Asset Value (NAV), is calculated daily by dividing the total value of all the fund’s assets, minus its liabilities, by the number of outstanding shares. This ensures that investors buy and sell shares at a fair price based on the current market value of the fund’s holdings.

Banks as Mutual Fund Providers

While banks are primarily known for traditional banking services like savings and checking accounts, CDs, and loans, many have expanded their offerings to include investment products, including mutual funds. These funds are often offered through the bank’s investment division or affiliated brokerage services. This expansion into investments and mutual fund offerings allows banks to provide more comprehensive financial services to their customers as a sort of one-stop shop.

Some larger banks (such as JPMorgan Chase, Wells Fargo, and Barclays Bank) have established their own mutual fund families, often operating as separate subsidiaries or divisions. These fund companies, while bearing the bank’s brand name, are typically structured as distinct legal entities to comply with regulatory requirements. For example, a bank might have its own asset management divisions that create and manage proprietary mutual funds, often focusing on core investment strategies that appeal to its existing customer base.

Other banks, particularly regional and smaller institutions, partner with established fund companies to offer mutual funds directly to customers. These partnerships allow banks to provide investment products without the overhead of maintaining their own fund management infrastructure. Under these arrangements, banks typically act as distributors or selling agents for the partner company’s funds, earning commissions (sometimes called “loads“) or fees for their distribution services.

Important

it’s important to note that investment services are typically not a bank’s primary focus or area of expertise.

Advantages of Buying Mutual Funds Through Your Bank

One of the most compelling reasons to purchase mutual funds through your bank is convenience. Banks offer integrated account management across various banking and investment accounts, along with unified statements showing all your financial holdings. This means you can monitor your checking, savings, and investment accounts in one place. Physical branch locations for in-person assistance may also be available.

Funding your investments and moving money between accounts is also easy, as internal transfers are often instant and free of charge.

Importantly, a bank may have lower account balance requirements than a brokerage firm, making investing a real possibility for more individuals. If a bank mutual fund has, for example, a $1,000 minimum requirement, ask if you can have that requirement waived in light of your ongoing relationship with the bank and other deposits. This can make investing more accessible to those just starting their investment journey or those with limited capital to invest.

People often already have a long-standing relationship with their bank, which can provide a certain level of comfort when venturing into investments like mutual funds. This existing relationship can provide customer support and make the process feel less intimidating for first-time investors.

Disadvantages of Buying Mutual Funds Through Your Bank

Banks don’t generally specialize in investing since they are more about savings, day-to-day financial transactions, and loans. That means that a bank may offer a more limited variety of mutual fund families to choose from. In some cases, this limitation can restrict your ability to diversify across different fund categories, sectors, or investment strategies.

Relatedly, banks that sponsor their own mutual funds may focus primarily on their own proprietary funds, which can lead to potential conflicts of interest where the banks’ recommendations are based on sales targets rather than investor needs. These preferred funds may also carry higher fees or expense ratios than similar funds offered by competitors.

Pros

• Convenience

• Easy funds transfers

• Lower investment minimums

• One-stop shop

Cons

• More limited selection of funds

• Higher costs

• Potential conflicts of interest

Comparing Banks and Brokerage Firms

To make an informed decision, it’s helpful to compare the features of banks and brokerage firms when it comes to buying mutual funds.

Considerations Before Buying Mutual Funds from Banks

Before committing to purchasing mutual funds through your bank, it’s important to conduct a thorough evaluation of both the financial implications and your personal investment needs. This decision requires careful consideration of several key factors that could significantly impact your investment outcomes.

Understanding the full cost structure of bank-offered mutual funds is essential. Banks may layer various fees into their mutual fund offerings, and these costs can add up to impact your long-term returns. Start by examining the expense ratio of any fund you’re considering; this ongoing cost reflects the percentage of your investment that goes toward the fund’s operation and management annually. However, expense ratios are just the beginning. Some bank-sold funds also carry sales charges, known as loads, which can be charged either when you purchase the fund (front-end load) or when you sell (back-end load). Look for “no-load” funds when available and appropriate. Additionally, banks may impose account maintenance fees, transaction costs for buying or selling shares, and early redemption penalties if you need to sell your holdings before a specified holding period.

But when evaluating these costs, it’s crucial to consider them in the context of the services you’re receiving. While higher fees might be justified if you’re getting valuable access to other banking services, investment guidance, and superior fund performance, they can be harder to justify if you’re primarily paying for basic fund access and minimal support.

Beyond the fee structure, take time to reflect on how bank-offered mutual funds align with your broader investment strategy. Consider your investment timeline. Are you saving for a near-term goal, like a home purchase, or are you building wealth for retirement decades away? Your time horizon should influence the types of funds you select and whether a bank’s typically more conservative offerings suit your needs. Risk tolerance plays an equally important role in this decision. Banks tend to favor more conservative investment options, which might align well if you’re a risk-averse investor. However, if you’re comfortable with more market exposure and seeking potentially higher returns, you might find bank offerings too restrictive. Consider how the available fund selection fits with your comfort level for market volatility and potential losses.

What Fees Are Associated With Buying Mutual Funds From a Bank?

Fees can include sales charges (loads), annual management fees (expense ratios), and account maintenance fees. Some banks may also charge a transaction fee—$20 to $50 per trade, for example—though many now offer no-transaction-fee funds. It’s important to ask for a detailed explanation of all fees before investing.

How Do Bank Advisor Incentives Affect the Mutual Funds They Recommend?

Most bank advisors are held to a less stringent “suitability” standard rather than a fiduciary duty, which would strictly mandate them to recommend the products that are in the best interest of their customers. Under this standard, they must recommend investments that are suitable for the client’s needs, but not necessarily the best or lowest-cost options. Thus they can prioritize their own interests or their bank’s interests over the client’s interests. Banks, moreover, may have only a limited selection of funds to offer, and these may carry higher fees. In addition, advisors are human and may receive commissions or incentives for selling certain funds, particularly those affiliated with the bank. This could ultimately lead to recommendations that favor the advisor’s interests over yours.

Are There Specific Mutual Fund Types That Banks Are More Likely to Offer?

Banks often promote their proprietary funds or those from partner institutions, which might limit exposure to funds from independent or competing fund families. In general, funds offered through banks may be more conservative than other offerings, and may include more simply structured funds, such as index funds.

How Do I Know if a Bank-Offered Mutual Fund Aligns With My Investment Strategy?

Always review the fund’s prospectus for information on its investment objectives, risk factors, fees, and historical performance. Also evaluate any additional fees or expenses layered on by the bank itself. Compare this data with your personal investment goals, time horizon, and risk tolerance.

The Bottom Line

While buying mutual funds from banks offers convenience and familiarity, it comes with important potential trade-offs in terms of fund selection, costs, and investment guidance. For some investors, particularly those just starting out or those who value integration with their banking services, bank-sold mutual funds may be an appropriate choice. However, more experienced investors or those seeking a wider range of investment options might find better alternatives through traditional brokerage firms.

Before making any investment decision, carefully consider your investment goals, compare costs and options across different providers, and ensure you understand all fees involved. Remember that the right choice depends on your individual financial situation, investment knowledge, and long-term objectives.

Reviewed by Pamela Rodriguez
Fact checked by Yarilet Perez

Signing your name on a document or check seems like a pretty straightforward process. So does endorsing a check for a spouse or child who’s out of town. However, all of these actions can have unpleasant legal ramifications depending on how you do them.

Key Takeaways

• Using the wrong color ink could keep your signature from being scanned correctly.
• Even with joint accounts, it’s illegal to endorse your spouse’s signature.
• It is also illegal to sign your child’s name on the back of a check.

The Ink Color Question

Think twice about the pen you use to sign a credit card application or check. Opt for a pen with the wrong color ink, and you could trigger a fraud alert or nullify the check.

Surprisingly, the wrong color ink can be black, says Jim Angleton, president of Aegis, a corporate prepaid debit- and charge-card issuer. “If you’re applying for a credit card in person, your bank may ask you to sign the application in blue ink.”

That’s because blue ink is harder to reproduce and easier to spot on paper that’s typically filled with lots of black print. And, Angleton says, because black ink is the most widely used printer ink color, it’s the easiest color to duplicate or copy via home software and printers.

“Blue ink is preferred because when black ink is used, someone at the bank or credit card company may not be able to tell whether they are looking at a photocopy of a signature or an originally inked signature,” says Cina L. Wong, CDE, a certified and court-qualified forensic handwriting expert. “It’s easier to assume that the document is ‘original’ if it is signed in blue ink.”

“We advise signers of our documents to use blue ink as it offers a contrast to our applications, which is especially beneficial should there be any ID issues in the future,” says Angleton.

Ink Color on Checks

Signing a check or endorsing the back of a check in red ink could trigger trouble—that is, it could delay payment of the check. In extreme instances of fraud prevention, it could even void the check’s validity.

“Red ink has been considered a warning color since the Cold War era,” says Angleton. “And the thinking that red is a warning color lingers today.” Long ago, bank proofers used a red pen to circle the signature on a check if they suspected it to be fraudulent. As a result, the color remains stigmatized in the financial industry.

In the days before color copying, red didn’t photocopy well, either. Because it would appear faint or non-existent on a photocopy, red pens were considered taboo for signing or endorsing checks, says Wong.

“Today, scanners that read documents use a red laser light,” Wong explains. “When the red laser light scans the document, it turns the entire document a red color. So a signature written in red ink appears to vanish.”

Stay Away From Other Ink Colors

Other ink colors such as green, pink, or purple can be problematic on checks, too. In general, most checks are imaged, or scanned, using a super high-speed scanner. Some types of scanners are unable to detect or decipher certain colors, which means that a check might not be properly applied or might have processing issues.

Wong says that’s one possible explanation for why most government documents state “please sign in black or blue ink.”

Signing for Your Spouse

The color of ink you use isn’t the only potential legal pitfall signatures can bring. Let’s say your spouse is out of town and you want to deposit an expense check or rebate made out to them. You could find yourself in legal trouble.

Even if you’re legally married and have a joint bank account, it’s illegal to endorse your spouse’s name on the back of a check, says Charles R. Gallagher III, an attorney at Gallagher & Associates in St. Petersburg, Florida. Technically, signing someone else’s name is fraud. And that could lead to the check being denied for payment and even to your arrest if your spouse were to press charges.

No Workaround

Many think the workaround to fraud is simply signing “For Deposit Only” on the back of the check. But Gallagher says that tactic is far from foolproof. If your spouse gets angry, they could still press the legal issue and claim you stole the money.

The safest approach is getting written authorization stating that it’s OK to sign a spouse’s name on checks when they are unable to. “You can always obtain a formal power of attorney to ensure the bank won’t give you a hassle,” says Gallagher.

Letting Someone Sign for You

Got a taste for take-out Chinese but don’t feel like picking up the food? Don’t send someone else to the restaurant with your credit card.

“You sign a legal contract with the credit card provider that authorizes only you to use the credit card. You’re breaching that contract when you give another permission to use your card,” says attorney Stephen Lesavich, Ph.D., author of The Plastic Effect: How Urban Legends Influence the Use and Misuse of Credit Cards.

“That breach may result in the cancelation of the card based on the terms of the credit card contract you signed,” Lesavich adds.

Of course, your credit card company may never know you gave your spouse, bestie, or kid your credit card to use. So the charge may sail through the system without any issues.

Note

It’s best to use blue or black ink for signatures. Avoid other colors.

Being Accused of Fraud

But the person you send to pick up your food could hit a snag if the merchant asks for identification, especially if the signature on the card doesn’t match the one on the receipt. “A merchant could report fraudulent use to the credit card company,” says Lesavich. Being accused of making or permitting fraudulent credit card charges could be embarrassing to both of you. It can also result in the credit card company canceling the card and/or putting a hold on it.

You’re also opening yourself up to potential loss. Frequently permitting someone else to use your credit card may be viewed as authorizing that person to act as your “agent.” “That person may incur additional charges you are responsible for, but did not initially authorize them to make or intend for them to make,” says Lesavich. “That’s why it’s important to remember that you are financially responsible for all charges for any authorized use of your own credit card by you or another person.”

Signing Your Child’s Name

It’s illegal to sign your name or your child’s name on the back of a check that’s addressed to your child.

“Banks usually have policies on how they want a check made out to a minor to be endorsed,” says attorney Matt Reischer, Esq., CEO, LegalAdvice.com. “Some banking institutions want the child’s name spelled out and designated parenthetically as a minor with the parent’s signature underneath.”

Other banks may want the check endorsed “For Deposit Only,” followed by the child’s bank account number. That’s why it’s best to verify with your bank about its endorsement policy to prevent Grandma from having to issue a new check.

Once your child is 18 or older, check-signing rules are the same as for your spouse. Unless you have a power of attorney or written authorization, signing your child’s name on the back of a check could be viewed as fraud and lead to the bank or your child taking legal action.

When Did Mobile Deposit Start?

Mobile deposit appears to have started in 2009, when USAA Bank allowed customers to deposit their checks on their phones.

Which Word Means a Signature?

Autograph is another word for signature.

Can a Pet Have a Signature?

Yes, in over half of the states in the U.S., a pet’s paw print can be used as the signature to witness a wedding. The pets that qualify are dogs, cats, hamsters, and rabbits.

The Bottom Line

Be aware of what you can and cannot do with your signature. Let your spouse and grown-up child sign their own checks—never in red ink—and get authorization if you need to bank on their behalf. Ask your bank about what to do with checks addressed to your child. Stock up on blue-ink pens and save the other ink colors for another day. You’ll be more likely to stay out of legal trouble that way.

Fact checked by Vikki Velasquez
Reviewed by Marguerita Cheng

Earnings season marks the time when a large number of publicly traded companies release their quarterly earnings reports. Each earnings season begins one or two weeks after the last month of each quarter. Investors see most public companies release their earnings in early to mid-January, April, July, and October. The exact date of an earnings release depends on when the company’s quarter ends.

Key Takeaways

• Earnings season is when publicly traded companies release their quarterly earnings reports.
• Most earnings reports are released in January, April, July, and October.
• Investors rely on earnings reports to see the financial health of publicly traded companies.

Earnings Timeline

Based on requirements issued by the Securities and Exchange Commission (SEC), publicly traded companies must file quarterly numbers using SEC Form 10-Q and annual figures with Form 10-K reports by required deadlines. Most public companies use calendar quarters, so earnings season follows this schedule. It typically begins early to mid-January, early to mid-April, early to mid-July, and early to mid-October.

Companies may issue a press release concurrent with their quarterly reports. These press releases often predict what management expects its numbers will be. Companies that issue a press release must file SEC Form 8-K, which announces a major event for shareholders.

Note

Earnings season ends as the number of reports slows and the filing deadlines approach.

What Earnings Season Means for Investors

Investors rely on earnings calendars to anticipate news from large publicly traded companies. Analysts, traders, and investors review earnings reports, which may affect their positions in a company.

Earnings reports often affect financial markets and other investments. It is not unheard of to see shares jump or fall based on earnings. It is also a highly active time for financial news media, such as CNBC and The Wall Street Journal. There is extensive media coverage of the major earnings releases from a general recap of the earnings to whether the companies missed, met, or beat analyst expectations.

For example, on Jan. 15, 2025, the earning reports of the largest U.S. banking groups were released, including JP Morgan Chase & Co, Wells Fargo & Company, Goldman Sachs Group, Inc., BlackRock, Inc., and Citigroup Inc. and the Dow Jones Industrial Average (DJIA) posted significant gains.

What Companies File Quarterly and Annual Earnings Reports?

Public companies with active shareholders that trade on exchanges like Nasdaq and the New York Stock Exchange must report accurate quarterly and end-of-year financial data.

How Does Earnings Season Affect Trader Behavior?

Some traders look forward to earnings season, as it can be a period where they can confirm their positions. Traders may short a stock before negative earnings and watch the price drop trigger a sell-off. Conversely, high production or revenue signals a swift upward trajectory or stock price for investors. Some investors may ignore the season with its “human” factors at play.

How Can Investors View Earnings Reports?

The SEC maintains the EDGAR database which includes quarterly and annual reports of publicly traded companies.

The Bottom Line

Earnings season occurs after the end of each quarter when most public companies release their earnings reports. Companies usually release reports with a press release. Financial markets respond to earnings reports and affect shareholder behavior.

Get a term life insurance policy that fits your needs and budget

Reviewed by Anthony Battle

If your family members depend on your income, a term life insurance policy can ensure they’re taken care of if you die. While it may be difficult to face that potential reality, it’s easy to get a term life insurance policy that provides peace of mind. In some cases, you may even be able to buy term life insurance online without a medical exam. We’ll cover everything you need to know to get the right policy for your needs. 

Compare life insurance quotes with Covr Financial before buying term life insurance.

What Is Term Life Insurance?

Term life insurance is a type of life insurance that provides a lump sum (or death benefit) to a beneficiary if you die. Term life insurance typically covers you for up to 30 years. If you die while the policy is in force, your beneficiaries will receive a death benefit. However, if you die after the term has ended, there is no death benefit (in most cases). Some term policies are convertible–you can switch your term policy to a permanent policy without another health screening. 

Term life insurance protects your family from having to replace your income or cover your debts if you’re no longer around. For example, you could choose a term that lasts until you’ve paid off your mortgage, your children are grown, and your spouse no longer depends on your income. Throughout the term, you’ll pay monthly premiums in exchange for coverage. The good news is, term life insurance is much more affordable than permanent life insurance, and it’s sufficient for most people. 

How to Buy Term Life Insurance

Determine How Much Term Life Insurance You Need

Generally speaking, you should buy enough life insurance coverage to replace the income you earn for your family, including “hidden” sources of income such as health insurance and 401(k) matching, plus a little extra to cover your final expenses. If that seems overwhelming to calculate, a general rule of thumb is to buy a policy worth 10 times your annual salary, plus an extra $100,000 to $150,000 per child to cover college expenses. 

Get Quotes

Once you determine how much coverage you need, you’ll want to compare quotes across a handful of reputable providers. Our research-based roundup of the best term life insurance companies is a great place to start. If you want to vet companies yourself, be sure to research the following:

• AM Best rating: Evaluates a company’s financial stability
• J.D. Power ranking: Rates companies based on a variety of consumer-focused criteria
• NAIC complaint index: Provides a complaint index that reflects customer complaints to state regulators and how that number compares to the number expected for a company of its size
• Customer reviews on independent review sites: Gives you insight into customers’ first-hand experience

You’ll also select companies based on features that are important to you. For example, you may only want companies that offer the coverage amount you need without a medical exam. You may also evaluate companies based on their application process and the digital tools they provide. 

You can often get a quote directly from the insurer’s website, but some companies may require a phone call. Another option is using an online brokerage or aggregator sites to collect quotes from multiple companies without needing to fill out multiple forms. You’ll typically need to provide the following information to get a quote: 

• Personal data: What is your zip code or address, citizenship status, social security number, date-of-birth, gender, height, and weight?
• Financial data: What’s your outstanding mortgage balance, your income, and your assets? You may also be asked how many children you have, too.
• Lifestyle choices: Have you used marijuana, tobacco, or other nicotine products within a certain period, such as the past five years? You may also be asked whether you engage in risky activities such as skydiving or rock climbing. 
• Policy choices: How much life insurance do you want, and what term do you need?
• Health history: Have you had past surgeries and other previous health conditions?
• Family medical history: Does your family have a history of certain conditions such as cancer, diabetes, heart disease, and high blood pressure? 
• Driving record: Have you had any DUIs or other driving violations?
• Credit score: Some companies may ask for your estimated credit score and might even run a hard credit check. 
• Occupation: You’ll likely pay more for life insurance if you work in a high-risk occupation. 
• Current health: You may be asked to take a medical exam, or you may be asked health screening questions. For example, you might have to provide a list of your current medications. 

Add Riders (Optional)

Some companies offer life insurance riders, which are additional features or benefits you can add to your policy. For example, you may need to purchase a rider to make your term life insurance policy eligible for renewal or conversion to a permanent policy.

Other riders may be included automatically at no additional charge. Many companies include accelerated death benefit riders, which allow you to access a portion of the death benefit while you’re still living under certain scenarios, such as terminal illness. A waiver of premium rider protects you if you become disabled and can’t pay for your policy. Decide which options are most important to you and determine whether your budget allows for the additional cost.  

Fill Out an Application

Many life insurance companies let you complete an application online. One of the main differences between applications is whether you need a medical exam. Some insurers require it, but others offer no-medical-exam life insurance to applicants in excellent health. 

Important

Some no-exam life insurance policies are instead designed for applicants in poor health. These are often called final expense or burial insurance policies. While they can be easy to get, they’re often very expensive, relative to the amount of coverage they provide.

If you get a medical exam, it typically includes a urine sample and blood test. It may also include an EKG, treadmill test, X-rays, and even a cognitive test. Some companies may offer to send someone to your home to perform the exam, making it more convenient for you. 

Purchase

Typically, your life insurance policy begins as soon as you’ve signed your policy documents and paid your first premium. Most companies will allow you to pay online via credit card, but some may require a check or bank transfer. 

Free-Look Period

During your policy’s free-look period, you can cancel without penalty and receive a refund of your paid premiums. This gives you the opportunity to ensure you are happy with your life insurance provider and policy. Laws vary by state, but insurers are typically required to provide a free look period of 10 to 30 days. Some insurers may offer a 30-day free look period to policyholders no matter which state you’re in. 

Do I Need Term Life Insurance?

If you have enough money to cover your final expenses and don’t have any dependents, you may not need term life insurance. However, if your family depends on your income to pay the bills, forgoing life insurance could leave your loved ones vulnerable to financial hardship if you die. And if you expect to have dependents in the future, getting life insurance when you’re young can be a good idea. But in this case, it may make more sense to get a permanent life insurance policy, such as whole life insurance.

Term Life Insurance Cost

The cost of your policy will depend on the term and coverage amount you choose along with any riders you add. Insurance companies also use many individual factors to determine your life insurance rates, including your current health, age, gender, smoking status, lifestyle choices, and occupation. Below are average rates people in excellent health may pay for a 30-year term policy based on their age. 

Source: Term4sale.com

Source: Term4sale.com

Best Term Life Insurance Companies

FAQ

What Is the Difference Between Term and Whole Life Insurance?

Term life insurance is temporary, while whole life insurance is designed to provide a guaranteed death benefit no matter when you pass away. Whole life insurance also has a cash value component you can borrow against. Due to these benefits, whole life insurance is significantly more expensive than term life insurance.

Is Term Life Insurance Worth It?

If you think your family’s financial well-being is worth protecting, then term life insurance is worth the cost. The best term life insurance companies offer affordable premiums, especially to younger policyholders. That said, if you don’t have any dependents and can afford your final expenses, you probably don’t need life insurance.

How Much Term Life Insurance Do I Need?

You should buy enough term life insurance to cover the income you expect to earn for your family over the course of your life. Don’t forget to account for employer benefits and other hidden sources of income as well. For a quick and easy estimate, multiply your salary by 10 and add enough to pay for your children’s college education.

Fact checked by Stella Osoba

These are interesting times for Tether. The world’s most traded cryptocurrency has also become the top choice of international criminals and others looking to make cross-border transactions out of sight of the mainstream global financial system.

As a result, Tether is attracting scrutiny from law enforcement agencies in the U.S. and EU. Meanwhile, Tether has garnered a significant investment from Wall Street titan Cantor Fitzgerald and its CEO, Howard Lutnick, Donald Trump’s pick to be commerce secretary, raising questions about potential conflicts of interest.

Key Takeaways

• With a market cap of $138 billion, Tether has become the world’s largest and most important stablecoin—and a favorite of international criminals looking to hide illegal transactions and launder money.
• Tether’s investors include Wall Street giant Cantor Fitzgerald, which is led by CEO Howard Lutnick, Donald Trump’s pick for secretary of commerce.
• Regulators in the U.S. are investigating Tether for possible violations of sanctions and anti-money laundering regulations.
• Tether’s growing financial and political influence will present unique challenges for regulators and law enforcement going forward, and its enormous size has created concerns about systemic risk.

What Is Tether and How Does it Work?

Tether was founded in 2014 by an Italian former plastic surgeon, Giancarlo Devasini, who had earlier helped develop crypto exchange Bitfinex, and American Brock Pierce, an entrepreneur who had previously co-founded Realcoin and has ties to Steve Bannon, a former White House adviser to Donald Trump.

Tether revolutionized cryptocurrency trading by offering a stable digital asset whose value is pegged to the U.S. dollar. This dollar peg is maintained through reserves that include U.S. Treasury bills, gold, Bitcoin, and various other assets.

Tether is now the world’s most traded cryptocurrency, and its market capitalization has grown from just a few billion dollars in 2019 to $138 billion in January 2025.

Why Some Criminals Like Tether

Despite its clear legitimate uses, Tether has come under increasing regulatory scrutiny, as it can also allow bad actors to move money around surreptitiously. According to a UN report from January 2024, USDT has emerged as a “preferred choice” for crime syndicates, allegedly facilitating some $17 billion in illegal trades.

The stablecoin’s appeal to criminals stems from its liquidity, relative anonymity, and ease of moving large sums across borders without traditional banking oversight. Drug cartels, sanctioned entities, and even terrorist organizations have reportedly used USDT to evade financial controls.

Important

While Bitcoin and other cryptocurrency transactions are recorded on public blockchains and can often be traced back to users (with enough resources and expertise), Tether transactions typically take place on exchanges or platforms with less stringent Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance. This creates opportunities for illicit transactions.

Howard Lutnick’s Tether Stake and Political Implications

Cantor Fitzgerald 5% stake in Tether, valued at about $600 million, has raised eyebrows in financial and political circles. Lutnick has emerged as a powerful ally. His firm currently manages much of Tether’s claimed billions in Treasury bills, earning substantial fees in the process.

Lutnick’s roles as Trump’s transition team co-chair and, if confirmed, secretary of commerce, has sparked concerns about potential conflicts of interest, especially given investigations into the use of Tether by bad actors.

The Moral Hazard of Tether’s Growth

Tether is mostly used for legitimate applications such as facilitating cryptocurrency and token trading, providing liquidity, and offering a stable store of digital value. This activity drives Tether’s rapid adoption across global markets and its integration into mainstream financial channels.

Because of this, some experts warn that Tether’s continued expansion could pose significant risks. Some scholars suggest that Tether has become “too big to fail” within the crypto ecosystem, and its collapse could spark contagion beyond digital assets.

Tether’s resistance to comprehensive audits, combined with the company’s growing influence in various sectors—including investments in artificial intelligence and video platforms—raises further questions about prudent financial management, systemic risk, and regulatory oversight.

The Bottom Line

Tether’s upward trajectory demonstrates both the promise and perils of cryptocurrency innovation. While it has become an integral part of the digital asset infrastructure, its growing size, regulatory challenges, and potential political entanglements create a complex web of risks and concerns, highlighting the increasingly blurred lines between traditional finance, cryptocurrency, and political power.

Reviewed by Margaret James

Capital is the cash obtained through some form of financing. It is critical to a company’s growth prospects and keeps everything flowing. That said, raising capital isn’t just for companies going through hard times. It is also required by successful companies looking to grow. Companies also use debt to buy back stock or pay dividends. The two primary ways that companies finance operations are with debt and equity.

Analysts are mixed on the use of debt to buy back company stock. Some believe using debt is smart when interest rates are low while others believe it leads companies to take on too much debt. While there’s nothing wrong with debt, too much of it can risk a company’s earnings. This is why analysts look at trends in measures of market capitalization, debt capitalization, and enterprise value to assess the capital structure of a firm. Below is a look at the capital structure of McDonald’s.

Key Takeaways

• Equity capital, debt capital, financial leverage, and enterprise value are key to analyzing any company’s capital structure.
• McDonald’s debt increased between 2023 and 2024.
• The company bought back millions of shares, reducing the number of shares outstanding.
• MCD debt-to-capital ratio remained flat between 2023 and 2024.

McDonald’s Equity and Debt Capital

McDonald’s (MCD) shares closed at $304.51 on Sep. 30, 2024. The number of shares outstanding dropped 1.59% to 720 million at the end of the third quarter of 2024 from the same period in 2023.

The company’s market capitalization increased from $191.99 billion in September 2023 to $218.22 billion in September 2024. This is an ideal situation for investors, as it means that the market value of the company’s equity has gone up, but at what cost?

Total debt increased by more than 7% (from $49.75 billion to $53.41 billion) over the same period that market cap increased. Long-term debt increased by 4.6% to $38.99 billion by Sept. 30, 2024.

McDonald’s bought back millions of shares in a stock buyback program in the year between Sept. 30, 2023, and Sept. 30, 2024, which reduced the total number of shares outstanding.

McDonald’s Financial Leverage

Using a financial leverage ratio like the total debt-to-capital ratio is an important way to analyze how much debt a company has in its capital structure. Investors can use this ratio to track debt relative to equity capital over time and in comparison to other firms.

MCD’s debt-to-capital ratio remained flat at 1.15 between the end of the third quarter of 2023 to the same period in 2024. This means that the company continued to fund its operations with $1.15 worth of debt for every dollar of its capital.

Note

There were over 38,000 McDonald’s location in more than 100 countries.

McDonald’s Enterprise Value (EV)

Enterprise value (EV), also known as a takeover price, is calculated by adding the company’s market cap plus all debt minus any cash and cash equivalents. A company’s market cap only looks at its share price and the number of outstanding shares. The EV, on the other hand, factors the company’s debt capital.

McDonald’s has an enterprise value of $269.42 billion as of Sept. 30, 2024, compared to its market cap of $218.22 billion. The formula to calculate EV is:

EV = Market Cap + Total Debt and Cash

The difference between the two ($51.2 billion) is the company’s debt and cash.

Is McDonald’s a Good Investment?

This depends on your investment goals and financial situation. But, overall MCD is a strong company with strong financials despite some weaknesses in its share price. The company has consistent revenue growth ($23.12 billion to $25.49 billion between 2023 and 2024), pays investors a dividend, and has global brand recognition. Investors should be weary of lower consumer spending, changing habits, and weakness in international markets.

Can Corporate Debt Negatively Impact Share Prices?

In some cases, a company’s debt can drag down its share prices. Debt can eat away at a company’s profitability and its ability to pay dividends (if it pays them), which can lead to lower earnings. Investors may perceive higher debt as a risk—especially if it adds to its short-term debt and cannot repay it. Long-term debt, although still a risk, tends to be cheaper and more affordable than short-term debt vehicles.

Why Is a Company’s Market Capitalization Important?

A company’s market capitalization is a way to measure its market value and size. This allows investors to compare similar companies. They can use this information to analyze the risks and whether certain companies are better suited to their financial goals and situation.

The Bottom Line

Increases in McDonald’s enterprise value are because of a rise in debt, which was used to pay for billions of dollars in share repurchases and billions more in dividends paid out to investors. It does not, however, mean that McDonald’s is over-capitalized or in trouble. It means that the price of money is still very low and companies such as McDonald’s are using this cheap capital to repurchase shares and pay dividends while sitting on large amounts of cash.