How do mutual fund trades clear and settle?

Mutual funds can be bought and sold daily. However, unlike equities and other types of securities that trade on the secondary market throughout each trading day, share transactions in a fund are carried out once each day after the close of market at 4 p.m. EST (Eastern Standard Time). With the exception of money market mutual funds, the clearing of a trade transaction is executed over the following one to three business days, depending on the fund company and the type of fund.

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. Depending on the type of fund (e.g., equity versus commodity) and the mutual fund family, the trade is cleared – trade orders are matched up and share ownership is registered and transferred – through a third-party custodian or clearing house. Equity and bond funds tend to clear within one day of the trade, while commodity and other types of funds take up to three days after the trade date. Money market mutual fund shares are the exception, as they are cleared on the day of the trade transaction.

The settlement date for a mutual fund trade is the date on which the transaction is considered to be finalized and closed. Money that a customer owes must be available in his account to cover the shares purchased by the trade settlement date. Likewise, 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.