Buying into a mutual fund is a common way to take advantage of the gains possible in the stock market without shouldering the same risks. Mutual funds are an easy way to invest in multiple stocks and other securities, without the expense of having to acquire multiple securities. Settlement refers to the process of trading or selling a mutual fund, which involves regulations that investors should be aware of when navigating the process.
When you buy into a mutual fund, you agree to certain terms, some of which involve settlement. Among these, one of the most useful and important is the settlement deadline. In most cases, the settlement deadline for a mutual fund is one business day after so-called day zero, which refers to the day on which you initiate a transaction. For example, this means that if you place an order to sell or trade a mutual fund on a Monday, the proceeds won't necessarily be available for deposit or to make another purchase until the end of the day on Tuesday.
Purchasing mutual funds is subject to the same settlement deadline rules as selling and trading them. For some trades, brokers establish longer settlement periods of up to two days. Others subdivide days into trading periods. For example, online broker Folio Investing settles mutual fund sales and purchases in morning, afternoon and evening periods. If you sell a mutual fund in the morning, you'll be able to purchase another fund with the proceeds during the afternoon or evening period of the same day.
Mutual fund prices change rapidly throughout the trading day, and from one day to the next. Because the settlement period for a mutual fund purchase is typically one business day, there is uncertainty as to the exact purchase price based on when you execute an order, and when the purchase is settled. However, these changes are generally minor; mutual funds are not subject to the same volatility, or likelihood of rapid change in value, that some stocks are.
Funds vs. Stock
Although mutual funds usually contain stocks, they do not follow the same rules when it comes to settlement. When you invest in a mutual fund, you agree to settlement terms with the broker or fund manager. Even if the same party also sells stock directly, you are bound by the settlement rules of the specific mutual fund you invest in. For example, stock market regulations and trading procedures usually lead to a three-day settlement period. When you execute a sale order for a mutual fund, the fund doesn't necessarily sell any stock, which allows for a shorter settlement period.