If you have an investment account with Vanguard, you’ve probably heard of a **settlement fund**. Think of it as the waiting room for your money. When you put money into your investment account, or when you sell an investment, that cash usually goes into your settlement fund first. Then, it waits there until you’re ready to buy something new or take the money out.
It’s a really important part of how your investment account works because it keeps your money ready for action. Vanguard offers a few different choices for this “waiting room.” Let’s take a closer look at what they are and how they work.
What’s a Settlement Fund, Anyway?
Imagine you have a special wallet just for your investments. When you add money to this wallet, or when you sell some stocks, the cash doesn’t just sit there doing nothing. Instead, it automatically goes into a special type of fund called a **settlement fund**.
This fund does two main things:
- It holds your cash safely.
- It earns a little bit of income while it’s waiting.
So, when you decide to buy new investments, the money comes right out of this settlement fund. And when you sell something, the money goes back into it. It’s like a central hub for all the cash moving in and out of your investment account.
Vanguard’s Main Settlement Fund Choices
Vanguard gives you a couple of popular options for your settlement fund. Each has its own features, especially when it comes to how your money is protected.
1. Vanguard Federal Money Market Fund (VMFXX)
- This is often the **default choice** for many Vanguard brokerage accounts.
- It invests in very **short-term government securities**. These are considered very safe.
- It aims to keep a stable price of **$1 per share**.
- **Important:** While it invests in government-backed securities, this fund itself is **not insured by the FDIC** (Federal Deposit Insurance Corporation). This means that in very rare, extreme cases, you could lose a tiny bit of money, though this is highly unlikely for a money market fund.
- It earns income, which is paid to you monthly.
2. Vanguard Cash Deposit
- This is a different option that offers **FDIC insurance** for your cash.
- If you choose this, your cash is held in a bank account that is insured by the U.S. government (FDIC) up to certain limits (usually $250,000 per person, per bank). Vanguard spreads your money across several banks to offer even higher insurance coverage.
- It also earns a competitive interest rate, like a savings account.
- This option is great if you want the extra peace of mind that comes with government insurance for your uninvested cash.
3. Vanguard Treasury Money Market Fund (VUSXX)
- This fund is similar to the Federal Money Market Fund, but it invests **only in U.S. Treasury securities**.
- Because it invests only in U.S. Treasury bonds and related agreements, it’s considered one of the **safest** money market options. These investments are backed by the full faith and credit of the U.S. government.
- Like other money market funds, it aims to keep a stable **$1 share price** and provides current income.
- It is also **not FDIC-insured**, but its investments in direct U.S. Treasury obligations offer a very high level of security.
Why These Options Matter to You
Choosing your settlement fund might seem like a small detail, but it’s important for a few reasons:
- Safety: How much protection do you want for your uninvested cash? FDIC insurance (with Vanguard Cash Deposit) offers a specific type of government backing. Money market funds (like VMFXX or VUSXX) are generally very safe but don’t have that same FDIC insurance.
- Income: All these options let your cash earn a little something while it’s waiting, which is better than just sitting in a regular checking account.
- Ease of Use: No matter which you choose, your money will automatically move in and out of the settlement fund when you buy or sell investments, making it super easy to manage your account.
When you set up your Vanguard brokerage account, you’ll usually pick one of these as your main settlement fund. You can often change it later if you want to.
Do you have any questions about which option might be best for different situations, or perhaps how to change your settlement fund choice?