How Do Variable Annuities Compare To Mutual Funds?
How Do Variable Annuities Compare to Mutual Funds? Variable annuities could be called mutual funds gift wrapped inside an annuity contract.
As mutual funds and variable annuities are both common investment types chosen by millions of people, some of their more notable differences and likenesses should be reviewed.
Mutual funds -
Mutual funds are very similar to variable annuities. Shareholders of a mutual funds buy shares in a fund. The money invested goes to a brokerage firm that which spreads it over a wide variety of asset types, from stocks to treasuries, to bonds. Annual returns reflect the performance of the investments and so a bad year for the stock market will be reflected in that part of the mutual fund. Management fees run in the range of 1-3% . The fees are charged by the brokerage firm that manages your portfolio. Mutual funds, which date back to the 1920s, allow for liquidity, instant diversification, and professional management.
Variable annuities -
For someone who is looking at retirement, or already has retired, mutual funds do not meet the needs of this group of people very well as they have the same potential to grow as variable annuities while not offering the same features and benefits. Other than having no 10% tax penalty for early withdrawal of funds for withdrawing funds prior to age 591/2, mutual funds have no advantages over variable annuities. There is one more interesting note concerning mutual funds and variable annuities. There is fewer redemption of capital due to the steep surrender fees imposed by annuity carriers and because annuities tend to be more a retirement focused investment opportunity than mutual funds.
Because variable annuities were designed to behave very similar to mutual funds, the fact that there are so many differences may be surprising to some. For the most part, these two investment tools can be powerful assets when planning for your future. Which one you decide to choose to invest in will be influenced by what you want out of your investment.
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