Variable Annuities Vs. Mutual Funds

The concepts of variable annuities and mutual funds are quite similar to each other, by the virtue of general mechanism and overall working of the investment and returns. Though the working of the two is quite similar and the rate of return offered by both types of investments is almost the same, there is a subtle line of difference between these.

How do Variable Annuities Compare to Mutual Funds?

In comparing variable annuities with mutual funds, it is first important to understand the definitions and basic structure of both these types of investments. A mutual fund is said to be an investment vehicle, which is made with the help of a pool of money which is contributed by several members. The pool is sometimes made up of several shares. So basically it's a large contributed sum of money which the fund managers, systematically invest into several sources that range from companies, corporations, stock markets and money markets. Mutual funds have an option of reinvesting the returns. The mutual fund company shares the profits made from the investments with the owners of the shares or mutual fund investors. The investment contribution is either a one time payment or is done in a set of several installments. The repayments or returns are however, done with the help of several payments. In case of reinvestment of the funds, a specified lock-in period is prescribed before which the share or contribution can be withdrawn. Now this is the most important part, the returns of a mutual fund are subject to market risks and even if the portfolio of investments is managed by professional fund managers, the returns are always in proportion with the portfolio performance, hence basically a mutual fund is completely subject to all market risks.

An annuity, on the other hand, is principally a contract of insurance wherein the annuitant or the owner of the annuity makes certain payments to the company which like in the case above, are invested into professionally managed investment destinations. The company repays the annuity owner or contributor the returns on the basis of periodic intervals. Now in the case of fixed annuities, the returns are fixed and predetermined. However, in case of variable annuities, the individual repayment is made up of Guaranteed Minimum Income Benefits, meaning that this sum is paid to the annuitant irrespective of the portfolio's performance. The second part of the returns is compromised of what is known as a bonus. This bonus depends upon the portfolio performance. Thus in short, the returns are partially subject to market risks. There are thus equal number of pros and cons of variable annuities, if you compare them with mutual funds. One big advantage of variable annuities is that they have a great death benefit, meaning that the annuitant's surviving relatives receive a set of returns which are subject to withdrawals from the annuity, if any.

Variable Annuities Vs. Mutual Funds

Here is a table depicting the differences in the two types investments and their features that distinguish them from one another.

Particulars of Comparison	Variable Annuity	Mutual Fund
Type of investment	Quasi-insurance, insurance	Investment fund
Returns	Semi-variable, variable	Subject to market risk and variable
Appropriate investor age	40 years or above	Below 40 years
Term /average time period	Mainly long term, reaching about 10 years	Found in all time periods, short, long and medium
Withdrawal	Permitted till a certain percentage	Permitted but after a stipulated lock in period
Tax implication	Chiefly tax differed, but taxed upon returns	Returns taxes as capital gains
Rate of return	Quite low as compared to mutual funds	Higher than mutual funds
Level of risk	Less risky than mutual funds	More risky than annuity
Guarantee of income	Guarantee of income till a certain point	No guaranteed income
Death Benefit	Assured death benefit	No death benefit

Though you can take help of the aforementioned table, points of comparison and other factors, calculating the rate of return and then assessing and making a decision, always works out.