Personal Finance

How Do Mutual Fund Trades Clear and Settle?

Mutual funds help millions of investors get the diversification they need to build a viable investment portfolio. But mutual funds have to follow rules from securities regulators to ensure that they handle trades properly, and the rules for clearing and settling mutual fund trades are slightly different than the corresponding rules that brokers follow with stock purchases and sales.

Different processes for different funds

Most mutual funds only set a share price once per day at the close of market trading. In order to prevent mutual fund traders from gaining an unfair advantage, purchases and sales of mutual fund shares are accepted only once daily, with trade requests received before a set deadline all occurring at the same time at the end of the trading day.

However, the clearing process differs depending on the type of mutual fund. Money-market mutual funds give investors a liquid investment vehicle that's similar to holding cash. In order to reflect the need for liquidity, money market mutual fund trades generally clear and settle on the same day that the investor makes a trade. The speed with which these trades clear makes money market mutual funds a viable choice for financial institutions to use them as cash equivalents for purposes of trading other types of securities.

Most other mutual funds follow a procedure that's lengthier than for mutual funds but which still happens more quickly than stock trades. Mutual funds typically settle transactions on the next business day after the trade is executed. Occasionally, certain specialty funds that deal in illiquid securities might provide for longer periods to clear and settle a fund trade, and the prospectus and shareholder agreement will specify the maximum waiting period if this is the case.

The upshot of the clearing and settling process for mutual funds is that fund buyers need to have cash available to settle their purchase more quickly than the three-day period that prevails for most stock transactions. Sellers, on the other hand, get access to their cash more quickly with a fund sale than with a stock sale, but they'll still have to wait a day to use the money for other purposes.

Finally, remember that these rules apply to traditional mutual funds. Closed-end funds and exchange-traded funds that trade on exchanges throughout the day typically have different rules, and many follow the same three-day clearing and settlement process that applies to stocks.

Knowing how mutual fund trades clear and settle will make you a smarter investor. In particular, it can be helpful to avoid some of the potential pitfalls in mixing up settlement periods for funds versus stocks and other assets.

The $15,978 Social Security bonus most retirees completely overlook

If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. In fact, one MarketWatch reporter argues that if more Americans knew about this, the government would have to shell out an extra $10 billion annually. For example: one easy, 17-minute trick could pay you as much as $15,978 more... each year! Once you learn how to take advantage of all these loopholes, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how you can take advantage of these strategies.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors based in theFoolsaurus. Pop on over there to learn more about our Wiki andhow you can be involved in helping the world invest, better! If you see any issues with this page, please email us Thanks -- and Fool on!

The article How Do Mutual Fund Trades Clear and Settle? originally appeared on

Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 - 2016 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics


The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More