Get a clear explanation of settlement funds, how they work under the T+1 settlement cycle, and why they’re crucial for buying and selling securities efficiently with Vanguard.

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Settlement fund

Settlement fund
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Points to know

  • You can use your settlement fund to buy mutual funds and ETFs (exchange-traded funds) from Vanguard and other companies, as well as stocks, CDs (certificates of deposit), and bonds.
  • You should consider keeping some money in your settlement fund so you're ready to trade.
  • Be aware of your trade's T+1 settlement cycle and settlement date, as that's when you will be required to have money available in your settlement fund to pay for investments.

Stock

A security that represents part ownership, or equity, in a corporation. Each share of stock is a proportional stake in the corporation's assets and profits, some of which could be paid out as dividends.

Broker/broker-dealer

A licensed individual or firm that executes orders to buy or sell mutual funds or other securities for the public and usually gets a commission for doing so.

Settlement fund

This holds the money you use to buy securities, as well as the proceeds whenever you sell.

Settlement date

The date by which a broker must receive either cash or securities to satisfy the terms of a security transaction.

Securities

Stocks, bonds, money market instruments, and other investment vehicles.

What is a settlement fund and how does it work?

Your settlement fund is the account used to buy investments and receive proceeds from any investments you sell.

When you buy or sell stocks and other securities, your transactions go through a broker, like Vanguard brokerage. Money to pay for your purchases is taken from your settlement fund and proceeds from your sales are received in your settlement fund.
 

When you buy investments

When you buy investments, you're paying for them with money in your settlement fund—so consider planning ahead. While you're not required to have a balance in your settlement fund at all times, keeping some money in the settlement fund has these advantages:

  1. You're more likely to have money to pay for purchases on the settlement date, when your account will be debited for the amount you owe.
  2. You'll reduce the risk of your trades being rejected, and likely avoid restrictions being placed on your account as a result of committing a trading violation, because you'll have money available when you're interested in placing a trade.

It's also important to check your funds available to trade before you transact. If you recently added money to your settlement fund by bank transfer or check, the money may not be immediately available to pay for brokerage transactions. That's because funds received by electronic bank transfer or check are subject to a 7-calendar-day hold.
 

When you sell investments

When you sell investments, the proceeds from the sale go directly into your settlement fund on the settlement date. Proceeds can only be withdrawn from the settlement fund after the trade settles.

If you intend to initiate a withdrawal and are planning on making more trades, make sure there will be enough money available in your settlement fund to complete any transactions within the T+1 settlement cycle. Doing so can help reduce the risk of restrictions, violations, penalties, and rejected trades.

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What is T+1 settlement cycle?

The T+1 settlement cycle describes the time period beginning when a trade is initiated until the transaction is final, typically after one business day.

T+1 is shorthand for "trade date plus one." The trade date is the day an investor executes a trade. +1 represents the settlement date, which is when the trade is completed. The settlement date is also when an investor is required to have the funds available to pay for investments, or will receive the proceeds from selling investments. Together, the trade date and settlement date form the T+1 settlement cycle.

What does T+1 settlement cycle mean for investors?

It's important to be aware of a trade's settlement date so you can initiate an electronic bank transfer beforehand if needed. This helps you ensure there's money available in your settlement fund to complete the transaction and reduce the risk of rejected trades.

The settlement date is also when you become a shareholder of record. Being a company's shareholder of record gives you the right to vote and receive dividends on specific dates set by the company.

Funding your settlement fund

You can add money to your settlement fund either by bank transfer or check. But remember, funds received by electronic bank transfer or check are subject to a 7-calendar-day hold and may not be immediately available, so it's always wise to check your balance before you buy investments.

Common mistakes that can result in insufficient funds include:

  • Not checking the settlement fund balance before placing orders.
  • Initiating a withdrawal or transfer after a trade but before the T+1 settlement cycle is complete, which can result in having insufficient funds.

Understand how to avoid trading restrictions, violations, and penalties.

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Your settlement fund options at Vanguard

Vanguard Federal Money Market Fund1 is our default settlement fund option. It invests in short-term U.S. government securities and is one of the most conservative investment options offered by Vanguard. It's also eligible for SIPC coverage up to $500,000.

The other settlement fund option is Vanguard Cash Deposit, a savings alternative that offers a competitive annual percentage yield (APY) of [APY]% as of [APY_Effective_Date].2 It's eligible for FDIC insurance up to $1.25 million for individual accounts and $2.5 million for joint accounts.3

While Vanguard Federal Money Market Fund is considered low-risk and can be used for short-term savings goals, Vanguard Cash Deposit provides the added security of FDIC insurance.

Frequently asked questions about settlement funds

Some settlement funds, such as Vanguard Cash Deposit, accrue interest. Our default settlement fund, Vanguard Federal Money Market Fund, is an investment product that can earn income.

If you plan to buy investments, yes. Having insufficient funds could result in trades being rejected, restrictions, violations, and penalties.

Proceeds from trades and any interest earned will remain in your settlement fund until you withdraw the money or use it to buy more investments.

Yes, the money in your settlement fund belongs to you. However, if you intend to initiate a withdrawal, make sure there will be enough money available in your settlement fund to complete any transactions within the T+1 settlement cycle to reduce the risk of restrictions, violations, penalties, and rejected trades.

You should also consider keeping some money in your settlement fund at all times so you're ready to trade.

Explore an FDIC insured option for your settlement fund with Vanguard Cash Deposit.

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1You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not a bank account and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor is not required to reimburse the Fund for losses, and you should not expect that the sponsor will provide financial support to the Fund at any time, including during periods of market stress.

2The annual percentage yield (APY) on Vanguard Cash Deposit is [APY]% as of [APY_Effective_Date]. The APY will vary and may change at any time.

3Bank Sweep program balances are held at one or more Program Banks, earn a variable rate of interest, and are not securities covered by SIPC. They are not cash balances held by Vanguard Brokerage Services (VBS), a division of Vanguard Marketing Corporation (VMC); VMC is not a bank. Bank Sweep deposits are covered by FDIC insurance up to $250,000 per insurable category of ownership at each Program Bank when aggregated with all other deposits held by you at such bank and in the same insurable category. VBS will aggregate and allocate Bank Sweep deposits to Program Banks across Vanguard Cash Plus and Vanguard Cash Deposit with identically registered accounts to offer maximum FDIC coverage up to $1.25 million ($2.5 million for joint accounts) when at least 6 Program Banks are utilized. VBS will aggregate and allocate Bank Sweep deposits for trust accounts at the account level and not at the beneficiary level. FDIC coverage may be decreased based on Program Bank limits and whether you've opted out of any Program Banks and is subject to applicable FDIC coverage limits. You are solely responsible for monitoring the aggregate amount that you have on deposit at each Program Bank in connection with FDIC limits. See the Vanguard Bank Sweep Products Terms of Use (PDF) and list of participating Program Banks (PDF) for more information. For more information about FDIC insurance coverage, please visit fdic.gov.

 

For more information about Vanguard mutual funds and ETFs, visit Vanguard mutual fund prospectuses or Vanguard ETF prospectuses to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

All investing is subject to risk, including the possible loss of the money you invest.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

When you are enrolled in the Vanguard Cash Deposit program, Eligible Balances that are swept to Program Banks are not securities: they are not covered by the Securities Investor Protection Corporation (SIPC), but are eligible for FDIC insurance. Eligible Balances swept to Program Banks are the obligations of each Program Bank, and are not cash balances held by Vanguard Brokerage Services (VBS). See the Vanguard Bank Sweep Products Terms of Use (PDF) for more information. Assets swept to the Vanguard Federal Money Market Fund are held by VBS, a division of Vanguard Marketing Corporation, member FINRA and SIPC. These assets are not covered by FDIC insurance. See the Vanguard Brokerage Account Agreement (PDF) for more information. You are responsible for monitoring the total assets you hold at each Program Bank for FDIC coverage and limitations. These total assets will include not only Eligible Balances under the Bank Sweep, but also any other deposits you may hold at those banks. For more information about FDIC insurance coverage, please visit the FDIC website at FDIC.gov.