Annuity Vs Mutual Funds: The Importance of Knowing The Difference

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Financial security and financial freedom are both equally important in the short-term and, most especially, in the long term. However, securing a stable job isn’t enough to be assured of financial security as well as financial freedom. You must also find ways to have other income streams and continue to grow your wealth. A way to do this is to invest using investment tools such as annuity and mutual funds.

Now, let’s take a look at annuity vs. mutual funds: what they are exactly and why it is important to know the difference between the two. 

What Is Annuity?

An annuity is an agreement or contract between an insurance company and you promising regular disbursements at a certain period in your life as long as you make a series of amortizations or a lump-sum payment. This is usually set up to provide income when you return.

You can either do payments in amortizations or a lump sum payment depending on your discussion with the insurance company. You will also be the one to choose when the disbursements start. It can be as early as the next day after you make a lump-sum payment or at a certain age until you die.

Another feature of annuities is its tax-deferred growth. This means that you don’t need to pay any taxes on the profit and gains from your investment until you start withdrawing the money you’ve invested.

What Is a Mutual Fund?

On the other hand, mutual funds are pooled funds that are collected from many people to invest in different financial instruments such as bonds, stocks, securities, and money market assets. From this pooled funds we call mutual funds, brokers and portfolio managers are the ones who choose where to invest the fund specifically and grow the money.

A mutual fund portfolio is different depending on the type you get and your risk appetite. By getting into mutual funds, you no longer need to watch the market every second and make decisions on buying a stock or selling a stock. Your portfolio manager already does this for you. If you don’t have the time to keep checking the stock market every single day, then mutual funds are perfect for you.

Why Is It Important To Know The Difference Between Annuities And Mutual Funds?

  1.     Align Your Investment Strategies with Your Investment Tools

One of the reasons why it’s important to know the difference between annuities and mutual funds is to align your investment strategies with your investment tools. Once you’ve ironed out an investment strategy, the investment tools will need to be aligned with it.

If you are investing for your retirement, then it might be best to get annuities. With annuities, you’ll be given assured sums every month or every quarter (depending on your agreement). This is perfect so that you’ll still have a steady income even after you retire and no risks are involved.

On the other hand, mutual funds won’t assure you a fixed sum for a period. You will still bear much risk when you invest in mutual funds. Mutual funds might be useful if you want passive income while you’re still young.

In other words, choosing between annuities and mutual funds depends on what your strategy and goals are in investing.

  1.     Know and Approximate Your Returns

Another reason as to why it’s important to know the difference between the two is because the returns of both investment tools are different. For instance, in annuities, the returns might be lesser since the risk is lower.

For mutual funds, since it’s being invested in stocks, which is very aggressive, you’ll earn higher returns. So, if you are aiming for higher returns, then you must go for mutual funds instead.

It all depends on what your goal is. If you want higher returns, then it is suggested that you go for mutual funds. On the other hand, if you need a more steady stream of income and don’t mind lower returns, then annuities are they way to go. That is why it’s important to know the difference because it depends on your direction.

  1.     Learn How Much Tax You Have To Pay

It’s important to know the difference between annuities and mutual funds because the way you pay and how much you pay tax for each type of investment tool is also different. Taxes can take up a large chunk of your profits if you are not aware of it.

With regard to tax expenses, annuities have the advantage. Unlike mutual funds where earnings are already taxed, annuities will only be taxed when you withdraw it. With annuities, you can save a lot more on taxes. This may seem very insignificant, but if you add the taxes up, you will find that you’d be saving so much more.

  1.     Evaluate Your Risk Appetite

For different investment tools, you take on either a lower or high degree of risk. When you choose between annuities and mutual funds, it is also important to know the difference in risk. Understand the risk you are taking before putting your money in either of the investment tools.

For example, since in mutual funds, the pool of funds from different people are invested in stocks and bonds, the risks are higher. It is up to you if you can stomach this degree of risk and be able to sleep at night.

On the other hand, annuities are safer and more secure. There are types of annuities called fixed annuities, wherein your interest rates are already fixed. In addition to that, you are guaranteed disbursements in the future.

Conclusion 

Investments are truly important whether you are young or old. What’s more, important is to be knowledgeable about the types of investments you get into. You need to research well and be well-informed of each kind of investment tool in order to make the best decision. Now that you have read the importance of knowing the difference between annuities and mutual funds, have you made your decision