How Do Mutual Fund Trades Clear and Settle?

Mutual funds can be bought and sold daily. Unlike equities and other securities that trade on the secondary market throughout the trading day, share transactions in a fund are carried out once each day after the market closes, usually at 4:00 p.m. ET. In most cases, the clearing of a mutual fund trade transaction is executed over the following business day. Keep reading to learn more about how these investment vehicles settle and clear.

Clearing the Trade

Once an investor places an order to purchase or redeem shares of a mutual fund (directly or through a broker or advisor), the transaction is carried out at the next available net asset value (NAV), which is calculated daily after market close. Most mutual funds price their shares at 4:00 p.m. ET by using the closing market price of all the securities held in the fund.

Depending on the type of fund (e.g., equity versus commodity) and the mutual fund family, the trade is cleared through a third-party custodian or clearinghouse. Clearing trades is the process of matching up trade orders and registering and transferring share ownership. Most mutual funds clear within one business day of the trade date.

Charges and Fees

Mutual fund trades may be subject to fees. Some funds have up-front payments, such as a sales charge or load, or fees paid when the shares are sold called a contingent deferred sales charge. Other fees may include the following:

• Short-Term Redemption Fees: Some funds charge short-term redemption fees for the costs associated with short-term fund trading. The fees can range from 0.5% to 2% of a trade and are typically applied to shares held for periods ranging from less than 30 days to less than 180 days.
• Short-Term Trading Fees: If a trader sells certain non-transaction fee funds within 60 days of purchase, they may have to pay a short-term trading fee.
• Transaction Fees: For some no-load funds, transaction fees may apply to purchases but not sales. The amount charged depends on whether the trade occurred online ($75) or through a representative ($100 minimum, $250 maximum).
• Purchase Fees: These fees are not the same as a front-end sales load because the fee is paid to the fund, not the broker.
• Exchange Fees: Some funds are subject to a fee when an exchange or transfer is to a fund within the same fund family.
• Account Fees: Some funds charge a separate account fee to cover expenses. These fees are often imposed when the dollar value of an account falls below a certain threshold.
  

Settlement Date

Mutual fund trades typically settle one business day after an investor initiates a transaction. This is referred to as T 1, where T is the trade date and 1 is the following business day.

So if an investor purchases shares on a Monday, they begin owning the shares the next day. If there is a weekend or holiday that falls during this period, the settlement takes place on the following business day. So if an investor sells shares on a Friday, the transaction settles on the following Monday.

Money that a customer owes must be available in their account to cover the shares purchased by the trade settlement date. Similarly, the proceeds from the redemption of fund shares must be deposited into the customer's fund account by the trade settlement date. Money market funds close and settle on the same day as the trade date.

The Bottom Line

Mutual funds let you pool your money and invest in a basket of related securities. Funds can give you exposure to equities, bonds, currencies, and other assets. Understanding the costs and how they settle can make you a more informed investor. Remember: funds come with different fees and often clear within one business day of a trade. So if you buy shares on a Monday, you'll own the shares on Tuesday. Keep in mind that holidays and weekends don't count.