Mutual Fund vs. Variable Annuity Performance

Choosing an investment vehicle for your money is important for your and your family's financial future. Picking the right one can be tricky, and it may be best to diversify into different types of investments. If you're comparing the performance and other features of mutual funds and variable annuities, you need to understand their similarities and differences, and how each impacts your overall finances.

Mutual Funds

Mutual funds combine several types of security investments into one fund you can invest in. An investment firm manages the fund and pools the money of many investors to buy stocks, bonds or other investment vehicles, such as money market funds. Depending on the investments purchased in the fund, you may be exposed to less or greater risk. You can lose money in a mutual fund, but you also have an opportunity to receive higher returns than with other, more secure, investment vehicles.

Variable Annuities

Variable annuities are managed through insurance companies and generally used for retirement income. This long-term investment vehicle gives you regular payments that usually begin at a future date. Normally, you spend a certain amount of time paying into the annuity during the accumulation period. This is invested on your behalf into vehicles such as mutual funds. The distribution period gives you regular payments that is usually inheritable, and a death benefit may be included.


Variable annuity returns depend on the amount of money that accumulates in your account and the performance of the mutual funds or other investments over time. Mutual funds also depend on market conditions and can be profitable, especially if the returns are invested back into the fund. However, since variable annuities are designated as retirement accounts, earnings are not taxed until the annuity is distributed, unless the money is withdrawn too early. Mutual fund earnings, on the other hand, are taxed annually based on your income level. When you receive your annuity distributions, you may be in a lower tax bracket and, subsequently, receive a benefit by not paying taxes at a higher rate.


An additional way to analyze the performance between mutual funds and variable annuities is to calculate the fees associated with them. If you withdraw your money from an annuity, you will be penalized an amount that is dependent on the year that it's removed. Otherwise, standard fees may include those for management of the fund, administrative and the cost for the death benefit. Mutual fund fees also have management and administrative fees attached. However, whereas annuities may have additional administrative fees from the insurance company, and the fund manager, mutual funds generally have only one expense. Also, similar to the cost of the annuity surrender charges, mutual funds can carry sales fees that are paid when shares are purchased or sold.