If you’ve recently opened a Vanguard brokerage account, you may have come across the term “settlement fund,” or the Vanguard Federal Money Market Fund.” You may have some questions about it and want to know how to use it. If so, you have come to the right place.
First, let us define what a settlement fund is. If you need help managing your investments, you should consider talking to a financial advisor.
What Is A Settlement Fund?
A settlement fund is a fund where your money sits after you sell your investments or receive dividends. You can withdraw that money and transfer it to your regular checking account.
Or, you can use that money to buy other investments.
A settlement fund is also money that you have transferred from your checking account so that you can buy stocks or other securities.
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Understanding the Vanguard Settlement Fund
A vanguard settlement fund is a fund where you have put money in so you can purchase Vanguard investments, such as mutual funds, stocks and bonds, ETFs, and retirement accounts such as Roth IRAs.
A settlement fund is also where your money may go when you sell investments or receive dividends.
For example, let’s say you want to create a Vanguard brokerage account to buy a mutual fund such as the Vanguard Total Stock Market Index fund. The minimum investment requirement for that fund is $3,000.
After you have created the account, Vanguard would ask you to transfer money from your checking so you can buy that mutual fund.
When you transfer the money, it actually goes to the Vanguard Federal Money Market Fund, which is your settlement fund. And once, that money is available, you can complete the transaction.
Also, when you receive dividends and/or sell brokerage products such as stocks, bonds, mutual funds, ETFs, that money gets put into the Vanguard settlement fund.
Your settlement fund will earn you some interest on the money it contains, but not a lot. To learn more about the interest, visit Vanguard.
However, any interest earned on money in your Vanguard settlement fund is taxable. But there is no charge or fee when transacting money to and from your fund.
Vanguard Investment Products That Use Settlement Fund
- Vanguard Mutual Funds
- Stocks & Bonds
- Vanguard ETFs
- Cash options
- IRAs: Roth & Traditional
- Vanguard ESG Funds
- Individual & Joint Accounts
- Vanguard 403(b) Services
- 529 education saving plans
- CDs & bonds
- Other mutual funds
- Vanguard Automatic Investing: Put Your Investments On Autopilot
- Vanguard CD Rates: How Much You Can Earn
Why You Should Always Have Money In Your Vanguard Settlement Fund
The rule of thumb is to always keep some money in your Vanguard settlement fund.
Doing so has several benefits.
The first is that you’ll always be ready to trade. When you have money available to purchase stocks and other securities right away, you will avoid wasting time.
A transfer from your bank to your Vanguard account can take a few days before the money is cleared and ready to use. So having that money ready is crucial.
Second, you will likely avoid restrictions on your account as a result of committing a trade violation.
While it’s always a good idea to keep money in your settlement fund, you’re losing money if you don’t reinvest your dividends.
Dividends you receive from your stocks or other securities go directly to your settlement fund. So if you want to grow your investments, set your account to “reinvest” so that the dividends can automatically be used to buy more shares.
The bottom Line
The Vanguard settlement fund is a fund available so you can buy investments. It is also money received from dividends proceeds or after you have sold investments. That fund should always have some money it to purchase investments. However, and if you haven’t done so, you should have your dividends automatically reinvested back into the settlement fund.
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2 Replies to “Understanding The Vanguard Settlement Fund”
What is the rate of return on the money that is in the Vanguard Federal Money Market Fund
According to the Vanguard website, as of 2/7/2023, the year to date return on the Vanguard Federal Money market Fund is 0.45%. Note that it is important to check the Vanguard website regularly as investment returns fluctuate. I hope that helps.
-Joel, Editor of GrowthRapidly.