How Do Mutual Fund Trades Clear & Settle?
When you decide to trade in mutual funds, you will need to execute the trades. Unlike stocks that trade through frenetic stock exchanges and vary in price from moment to moment, the mutual fund trade process is calmer and simpler.
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Account Setup
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When you trade mutual funds, you buy and sell with the fund company itself, either directly or through an intermediary like an investment advisor or an online brokerage account. If you do not already have an account set up to hold the funds, you can open one at the fund company or through another brokerage option. In most cases, opening an account with one fund company does not prevent you from investing in other mutual funds with the same account. Simply choose the "brokerage" account option during setup to get access to a full array of fund options.
Trade Order
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When you are ready to buy or sell, you must place a trade order. You may do this via telephone or through your brokerage account's online system. In some cases, you will be required to have funds in your account prior to making a purchase. In other cases, you may set up an automated withdrawal from your bank account. Check with your brokerage or advisor to verify the procedure. Trade orders must be in to the fund company by 5 p.m. EST in the U.S. to be executed that day.
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Trade Execution
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Trade orders are expressed in shares or dollars: "Sell 100 shares" or "Buy $200." In either case, the fund company will do the exact match after market close when the price is known. You will see the final detail of the trade in your account the next day: "Sell 100 shares" becomes "sold 100 shares at $4 each for $400 total."
Settlement
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Trade settlement occurs on the next business day following your trade order for all traditional mutual funds. On settlement day, you will receive credit for any shares purchased and cash will be debited from your account. If you sold shares, they will be subtracted from your account balance, and you will receive the proceeds in your brokerage account.
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