Mutual Funds vs Annuities

6 mins read

Mutual funds and annuities are both financial options that investors choose for their financial growth. Both these options share similar features but are different from one another and fulfill different purposes. A mutual fund is a financial investment option in which a professional fund manager actively manages shareholders’ invested money. At the same time, an annuity is an option in which the holder is guaranteed a lifetime income.

Both annuities and mutual funds have the option to invest and save; however, which option is best for whom will depend on the individual’s personal goals and risk tolerance. In simpler terms, it means that an investor must choose its option as per his risk tolerance capacity, short-term and long-term goals, retirement timeline, etc. One can better understand which financial option will suit your goals the best after understanding the differences between the two.

What is an Annuity?

An annuity is a contract that is designed to provide guaranteed income during the person’s retirement years, with the added benefit of growth compared to equity investments. It is between an insurance company and an individual.

This nature of annuities by providing guaranteed income during retirement years makes it ideal for people with specific estate planning and time in goals.

The tax treatment of the annuities appeals to people who want to defer taxes till they reach an age where they begin taking distributions.

This annuity can be deferred or immediate, offering people the flexibility to reap the benefits of the fixed-rate call when comfortable and less stable return to help develop a strategy for taking advantage of market gains.

People can avail of benefits by buying Annuities are income for life, long-term care, a legacy to beneficiaries, and principal protection.

What is a mutual fund?

Mutual funds are a pool of money or can be called pool securities that invest in various instruments such as bonds or stocks. Many investors own them, and they buy shares in the fund; the funds invest the money based on its objectives. The returns from these are distributed equally among the investors of the funds.

There are thousands of mutual funds in the financial market that an investor can invest in. Mutual funds can be used to fulfill different objectives, but these funds are most appropriate for income while in retirement or for long-term growth. Still, for ease, they can be broken into a handful of different categories such as small-cap stock, large-cap stock, Bonds, and international stock.

Now, let us look into the differences and similarities between these two investment options:

Similarities between Annuity and Mutual fund

1. Strategy for investment

The most significant similarity between variable annuities and mutual funds is that they both use the pool of money from the investors to purchase a variety of bonds, stocks, or cash. Mutual funds can invest in almost any strategy that is available in the market ranging from small niche sections of the market to the entire broad index or asset class. Variable Annuity is also very similar to mutual funds because of the sub-account investment. They use the sub-accounts pool money to buy bonds, stocks, and cash under the guidance of the portfolio manager.

2. Fee structure

Mutual funds and annuities are also similar in the case of sale charges and expenses. The mutual fund’s sales charges work either through an upfront “A share” sales charge or with the help of a “C share” sales charge.

Annuities also work similarly in the case of the sales charges. In this case, there is both the upfront sales charge and a level load associated with the variable annuities. A significant difference between mutual funds and annuity is that unlike in mutual funds, where the sales charge is deducted from the investment value and then charged in the form of a contingent deferred sales charge only in the case of the annuity investor wanting to cash out early.

Differences between Annuity and Mutual fund:

1. Taxation

One of the most fundamental differences between annuities and mutual funds is taxation outside a recurring retirement account. In the case of mutual funds, holders are taxed for dividends and subject to capital gains whenever a position is sold. The holders of the mutual funds are also subject to the capital gain distributions embedded in the funds. The capital gains are passed directly to the individual mutual fund shareholders regardless of when they first purchase the fund. The portfolio manager then makes several taxable changes using the underlying investments within the funds.

When thinking of annuity vs. mutual funds, annuity is different as it offers a form of tax deferral. Holders can easily exchange sub-accounts without incurring any capital gains. Also, the dividends issued within the sub-account are not at all taxed, and sub-account money managers do not tend to pass on the capital gain distribution when they sell any of the underlying positions. Even though this may seem a benefit for some investors when cashing or withdrawing out the annuity, any gain above the original cost bases is taxed as ordinary income, which is opposed to the capital gain rates. For example, if an annuity on owner purchased a Rs.5000 annuity And sold the same a few years later for Rs.10,000, then the Rs.5000 gain would be taxed at the tax bracket. The same Rs.5000 gain would be taxed at either a 15% or 20% capital gain rate if it were a mutual fund.

2. Regulatory framework

The second point of difference between mutual funds and annuities is how each of them is regulated. On the one hand, mutual funds are regulated through the securities exchange commission (SEC). The SEC is the one who created the investment company act of 1940 to ensure that all the fund companies abide by the same rules to provide liquidity, transparency, safety, and a well-maintained audited track record. According to the act, those individuals who sell mutual funds should be fully licensed with either a series 6 or series 7 general securities representative exam administered by the financial industry regulatory authority (FINRA).

On the other hand, Annuity is not regulated by the securities and exchange commission but instead by the state insurance commissioners. For individuals to sell annuities, they must pass the state’s corresponding insurance license.

Mutual funds Vs. Annuity after retirement

Both annuity and mutual funds offer you different choices for your retirement savings needs. When investing for retirement, it is essential to determine how you want to receive income in both cases. When compared, annuities generally offer more options for obtaining this retirement income.

With this, you can take up lump sum or systematic withdrawals or select from the following income options.

Joint life annuity:

This option offers regular benefit payments for the life of the annuity owner and a partner.

Single life Annuity:

It offers regular benefit payments for the life of the annuity owner.

Interest-only payments:

This option offers regular payments in the amount of interest that would ordinarily be credited to a retirement annuity.

Fixed period annuity:

In this case, income is paid for a specified number of years.

Partial Annuitization:

Offers a strategy to annuitize a portion of your account balance to generate income. In this case, the balance remains invested until a later date.


Mutual funds are cheaper options when analyzed from a pure investment management perspective, but they lack in offering the income or death benefit guarantees that are fulfilled in the case of Annuity. Also, Mutual Funds can be inefficient from a tax perspective compared to the tax difference and duties offered. Both annuities and mutual funds have the option to invest and save; however, which option is best for whom will depend on the individual’s personal goals and risk tolerance. In simpler terms, it means that an investor must choose its option as per his risk tolerance capacity, short term and long term goals, retirement timeline etc. If an investor wants to make a good gain, he should do a fair amount of research before deciding whether an annuity or a mutual fund is the best choice to meet his desired investment goals.