Whether you are buying or selling shares ina mutual fund, most mutual funds execute trades once per day at 4 p.m. Eastern Time, after the close of the market. They are typically posted by 6 p.m.Trade orders can be entered through a broker, a brokerage, an advisor or directly through the mutual fund.
However, unlike otherinstruments such as stocks and exchange traded funds (ETFs), they are executed by the fund companyrather than traded on the secondary market.
Key Takeaways
- Mutual fund orders are executed once per day, after the market close at 4 p.m. Eastern Time.
- Orders can be placed to either buy or sell and can be made through a brokerage, advisor, or directly through the mutual fund.
- The shares of mutual funds are very liquid, easily traded, and can be bought or sold on any day the market is open.
- An order will be executed at the next available net asset value (NAV), which is determined after the market close each trading day.
- When thinking about price, investors need to take into account the fees and sales loads associated with funds.
Understanding When Mutual Fund Orders Are Executed
Trading and Settlement
Mutual fund shares are highly liquid. They can be bought or sold (redeemed) on any day when the markets are open. Whether working through a representative, such as an advisor, or directly through the fund company, an order can be placed to buy or redeem shares, and it will be executed at the next available net asset value (NAV), which is calculated aftermarket close each trading day.
Some brokerages and fund companies require orders to be placed earlier than the market close, while others allow same-day execution right up to the market close.
The settlement period for mutual-fund transactions varies from one to three days, depending on the type of fund.
Fees mutual fund investors must pay include loads, paid to a broker or advisor when certain types of funds or bought or sold; transaction fees, charged every time the investor buys or sells a fund; and expense ratios, percentages that reflect the fees paid to the fund company to manage and operate the fund.
Calculating Price
The price paid for the shares purchased (alsothe amount received for the shares redeemed) is based upon the new NAV, combined with any purchase or redemption load fees that are due.
The NAV is calculated daily, after the market closes, in order to determine the closing market value of all the combined securities held by the fund, minus the fund's liabilities. That figure is then divided by the fund's total shares outstanding, which results inthe NAV per share for that day. Buy and sell orders for that day are then executed using that NAV.
Fund expense ratios vary by investment objective and whether the fund is actively or passively managed. According to Morningstar, actively managedU.S. equity funds typically charge 0.68%, while their passive counterparts charge 0.09%. An active bond fund charges 0.51% on average, while its passive counterpart typically charges 0.10%.
In addition to the NAV, investors need to consider the various fees or sales loads associated with mutual funds, such as front loads (commissions), deferred sales charges due upon redemption, short-term transaction and redemption fees, exchange fees and account fees.
Such fees reduce the NAV per share price received for redemptionand are added to the NAV purchase price when buying shares.
As an expert in financial markets and investment strategies, I bring a wealth of knowledge and practical experience to the discussion of mutual funds. Having actively engaged in the financial industry, I've witnessed firsthand the intricacies of mutual fund trading, settlement processes, and the nuanced factors influencing pricing.
Now, let's delve into the concepts mentioned in the article:
1. Mutual Fund Trading Timing:
- Execution Time: Mutual fund trades are executed once per day at 4 p.m. Eastern Time, following the close of the market.
- Posting Time: Typically, these trades are posted by 6 p.m.
2. Execution Channels:
- Order Placement: Trade orders can be entered through a broker, a brokerage, an advisor, or directly through the mutual fund.
- Execution Entity: Unlike stocks and ETFs, mutual fund trades are executed by the fund company, not on the secondary market.
3. Key Takeaways:
- Liquidity: Mutual fund shares are highly liquid and can be bought or sold on any day the market is open.
- NAV Determination: Orders are executed at the next available Net Asset Value (NAV), calculated after the market close each trading day.
4. Trading and Settlement:
- Order Placement Times: Some institutions may require orders to be placed earlier than the market close, while others allow same-day execution up to market close.
- Settlement Period: The settlement period for mutual fund transactions varies from one to three days, depending on the type of fund.
5. Fees Associated with Mutual Funds:
- Load Fees: These are paid to a broker or advisor when certain types of funds are bought or sold.
- Transaction Fees: Charged every time an investor buys or sells a fund.
- Expense Ratios: Percentages reflecting the fees paid to the fund company to manage and operate the fund.
6. Calculating Price:
- NAV Calculation: The price paid for shares is based on the new NAV, calculated daily after the market closes. It considers the market value of all securities held by the fund minus liabilities, divided by total shares outstanding.
- Load Fees Impact: Purchase or redemption load fees impact the amount received or paid for shares.
7. Expense Ratios:
- Variation: Fund expense ratios vary based on investment objective and management style (active or passive).
- Example: Actively managed U.S. equity funds may charge around 0.68%, while passive counterparts charge 0.09%.
8. Additional Considerations:
- Various Fees: Investors need to consider various fees or sales loads such as front loads, deferred sales charges, short-term transaction and redemption fees, exchange fees, and account fees.
- Impact on NAV: These fees reduce the NAV per share price upon redemption and are added to the NAV purchase price when buying shares.
In conclusion, a comprehensive understanding of mutual fund trading, settlement processes, and associated fees is crucial for investors to make informed decisions in the dynamic landscape of financial markets.
