How Do Mutual Fund Trades Clear & Settle?

by Vicki A. Benge

Brokerages that offer fund families, that are groups of funds managed by the same company, generally settle orders quicker among the family of funds. Selling one mutual fund to purchase another in a different family of funds can take one to two business days longer to settle than trading within the same family of funds. In addition, processing times for initial purchases into a fund vary by brokerage and fund management.

Next Available NAV

U.S. laws governing securities mandates that the net asset value, or NAV of a mutual fund be recalculated at the end of each trading day. The NAV for a fund is figured by multiplying the number of shares outstanding by the market value of the assets the fund owns. Consider for example, a mutual fund that owns the stocks of 100 companies. Throughout a normal trading day the current market price of the stock shares of the 100 companies will fluctuate. At the end of the trading day, generally at 4:00 p.m., the closing prices of the assets within the fund are used to determine the current market value for the day. The number of outstanding shares is divided into this total value to determine the newest NAV for the mutual fund.

Fund Families

Although the rules from brokerage to brokerage may vary somewhat, generally mutual fund trades authorized prior to 4:00 p.m. on a normal trading day are executed at the next available NAV. Suppose you place an order to purchase 1,000 shares of a particular mutual fund at 2:00 p.m. Generally, the trade will be executed at the next available NAV and settle the next business day. Some brokerages, such as Fidelity, inform account holders that mutual fund trades made outside the family of funds take an additional day to settle. However, for trades made within the same family of funds, settlement occurs the same day.

Brokerage Examples

Standard times for clearing and settling, do however, vary by brokerage. For example, Scottrade informs clients that the majority of mutual funds purchased through Scottrade settle three business days after trade date, or on the fourth day. Sharebuilder, on the other hand, follows a guideline of settling mutual fund trades one day after trade date and specifies that trade date refers to the day the purchase or sale executes.

Ownership Transfers

Mutual fund purchases and sales are considered cleared and settled when the transfer of ownership of the shares is completed. Basically, how it works is an investor places an order for a purchase or sell. The brokerage then executes the sale at the next available NAV. Ownership is transferred, which can take one to three days to complete, depending on the policy of the brokerage. Upon completion of the ownership transfer transaction, the mutual fund is said to be cleared and settled.

Photo Credits

  • Medioimages/Photodisc/Photodisc/Getty Images