When Can You Buy and Sell Actively Managed Mutual Funds?
Understand the unique timing and process for buying and selling actively managed mutual funds, from daily pricing to settlement and common restrictions.
Actively managed mutual funds serve as popular investment vehicles, pooling capital from numerous investors to be managed by professional fund managers. These funds then invest in a diversified portfolio of securities like stocks, bonds, or other assets, aiming to achieve specific investment objectives. Unlike individual stocks or exchange-traded funds (ETFs) which trade continuously throughout the day, the mechanism for buying and selling mutual funds operates differently, with specific timing and conditions that investors need to understand.
Understanding Mutual Fund Trading Mechanics
Mutual funds are distinct from other securities because their pricing occurs only once per day. This daily valuation is based on the fund’s Net Asset Value (NAV), which represents the total value of the fund’s assets minus its liabilities, divided by the number of outstanding shares. Fund companies calculate this NAV after the close of the major U.S. stock exchanges, typically around 4:00 PM Eastern Time (ET). The calculated NAV is usually posted by 6:00 PM ET.
Any buy or sell orders for a mutual fund placed on a given business day are executed at that day’s calculated NAV. This “forward pricing” mechanism ensures fairness, as all investors receive the same price for transactions made on the same day. Consequently, investors cannot engage in intraday trading of mutual funds to capitalize on real-time price fluctuations, unlike with stocks or ETFs.
Placing and Executing Orders
The practical timeline for placing mutual fund orders revolves around a specific “cut-off time.” For most mutual funds, this cut-off time aligns with the close of the New York Stock Exchange at 4:00 PM ET. However, some financial intermediaries or specific fund types, such as liquid funds, may have earlier cut-off times, sometimes as early as 12:00 PM ET or 1:30 PM ET. Investors must verify the exact cut-off time with their brokerage or the fund prospectus.
Orders received by the fund company or intermediary before this daily cut-off time on a business day will be processed at that day’s NAV. If an order is placed after the cut-off time, or on a weekend or holiday, it will be processed using the NAV calculated on the next business day. Orders can typically be placed through online brokerage platforms, by phone with customer service, or directly through a financial advisor.
Transaction Settlement and Fund Availability
While the price of a mutual fund transaction is determined at the daily NAV, the actual transfer of shares and funds takes additional time, known as the settlement period. For most mutual fund purchases and sales, the settlement period is typically Trade Date plus one business day (T+1).
It is important to note that while the funds may show in an account balance immediately after the trade date, they are not truly “settled” and available for use until the T+1 period has passed. Market holidays can extend this settlement period, as business days exclude weekends and holidays.
Common Trading Restrictions and Fees
Mutual funds often implement policies to discourage short-term trading, which can negatively impact long-term shareholders and fund management. These “frequent trading” or “market timing” policies typically define a “roundtrip” as a purchase followed by a sale within a specified short period, often 30, 60, or 90 calendar days.
Funds may impose limits on the number of roundtrips allowed within a certain timeframe before issuing warnings or imposing trading blocks. Violations can lead to temporary or even permanent restrictions on future purchases or exchanges into the fund.
Beyond trading frequency, investors may encounter specific fees or restrictions impacting their ability to buy or sell. Redemption fees are common charges applied to shares sold within a short duration after purchase, such as 30 or 90 days, designed to deter rapid exits. These fees, which can range from 0.25% to 2% or more of the redemption amount, are typically detailed in the fund’s prospectus.
Additionally, mutual funds can close to new investors, halting purchases to manage asset size or maintain investment strategy effectiveness. In very rare and extreme market conditions, such as a major stock exchange closure, mutual funds may also temporarily suspend redemptions, though this is an infrequent occurrence and typically only happens under specific regulatory allowances.