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How your money gets put to work

February 20, 2014

Technology has made mutual fund transactions a simple task for today's investors. Log on to your account, and you can quickly and easily buy shares, redeem shares, or make an exchange from one fund into another.

But have you ever wondered what happens on our end? Executing your transaction involves an intricate series of activities that few outsiders ever witness. In this article, we offer a peek behind the scenes at how we process a client's purchase of shares in Vanguard Total Stock Market Index Fund, the nation's largest mutual fund.

Paul Heller"We aim to deliver a flawless experience for the shareholder, whether you're interacting with our associates or transacting with us electronically or by mail," said Paul A. Heller, managing director of Vanguard's Retail Investor Group. "Between the moment that we receive your request and when you view a completed transaction on vanguard.com, it's a well- synchronized performance of people, processes, and systems.

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Although technology means that many transactions don't need to be touched by human hands, thousands of Vanguard crew members help make our daily operations run smoothly. In addition to the groups directly involved in putting your money to work, others provide support and oversight. Backing it all up is a comprehensive set of controls designed to safeguard client assets and information and ensure that all regulatory requirements are met.

Processing your request

Millions of dollars in transactions are handled each business day by Vanguard's processing center outside Philadelphia.

Most Vanguard mutual fund transactions occur as electronic bank transfers. Shareholders find this method a convenient way to invest, and it's certainly the most cost-effective from Vanguard's perspective, with little manual processing required on our end.

Setting up the bank-transfer service takes just a few minutes on vanguard.com. Once you've done that, you can make a transaction by logging on to the site and clicking on the Buy & Sell tab. If you initiate a transaction before the close of the New York Stock Exchange (usually 4 p.m. Eastern time), you'll get that day's closing price. In the case of a purchase, the money will generally move from your bank account to Vanguard the next business day.

Clients use traditional paper checks to pay for purchases too. Traditional checks constitute only about 20% of our transaction volume, but they are a significant part of our processing operation, involving hundreds of Vanguard crew. Our processing associates open the mail, scan the check and the accompanying paperwork to create an electronic image, enter the transaction request into our recordkeeping system, and transmit the check image to our bank.

Clients also make purchases by sending wires or using our mobile application:

  • Wire transactions, while less common, are sometimes favored by clients investing large amounts.
  • Our mobile channel is the newest way to invest. You enter the necessary information on your smart phone or other device and take a picture of the check using Vanguard's mobile app.

Managing cash flow

When you buy mutual fund shares in your Vanguard individual account, your money is initially deposited at a bank account in the name of The Vanguard Group, Inc., which provides recordkeeping and shareholder services for the Vanguard funds. Once we have processed your purchase request, the money moves to a bank account owned by the fund you are buying.

Money movement is overseen by our Fund Financial Services department. The crew there also keeps a close eye throughout the day on shareholder purchases and redemptions and provides reports to the portfolio managers so they can better predict cash flows into and out of their funds.

Executing trades

By late afternoon, portfolio managers of equity funds have good estimates of the day's incoming cash, which helps them determine what trading they need to do. The managers use this to draw up a list of securities to be bought at the market close.

An equity fund may invest in thousands of stocks. For example, the Total Stock Market Index Fund holds more than 3,500 stocks.

It's important to note that shareholder activity—purchases, redemptions, and exchanges—is just one factor in the fund's trades for the day. Reinvested dividends, corporate actions such as mergers and acquisitions, and—for an index fund—changes in the composition of the fund's benchmark also determine which securities will need to be bought and sold.

The portfolio manager transmits the day's order to a broker through trading platforms that allow the fund to buy and sell securities anonymously, a practice that prevents other investors from taking advantage of our fund's transaction activity.

A trade support team working closely with the portfolio manager ensures that all trades are executed as the manager requested.

Pricing the funds

As the day ends, the action moves back to Fund Financial Services. There, Vanguard's fund pricing team completes calculations of our funds' net asset values (NAV). This process, too, is intricate, relying on people, carefully designed procedures, and interactions involving multiple computer systems to ensure accuracy and timeliness.

Fund pricing involves two key activities:

  • We collect security prices for the funds' underlying holdings—about 75,000 securities a day—beginning shortly after 4 p.m. Eastern time, when the markets close. The process is automated—the prices are fed to Vanguard's fund accounting systems by vendors who get the information from the financial markets—but our securities pricing team closely monitors the feeds to validate the data.
  • We then calculate each fund's NAV based on the security prices and other accounting information (a fund's payables and receivables are factored in daily). Although the calculations are automated, our fund analysis team checks the fund prices for accuracy. For our index equity funds, the initial check looks at whether a fund's NAV correlates closely to its benchmark's NAV. Any discrepancy is investigated and resolved.

Fund prices must be transmitted to Nasdaq by a 6:05 p.m. deadline to be published in the next morning's newspapers. Nasdaq then disseminates the information to its subscribers, which also include business wire services such as Bloomberg and Reuters.

By 6:30 p.m., updated fund prices are available on vanguard.com. Our systems also transmit updated fund prices to our recordkeeping system, which calculates how many shares your purchase bought.

Posting your transaction

Your completed purchase becomes visible on vanguard.com shortly past midnight Eastern time, so you can see it by logging on to your account any time after that.

Your confirmation will come via U.S. mail or electronically, depending on which method you have chosen.

Thank you for investing with Vanguard!

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

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