Explain the difference between an annuity and a mutual fund.

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kipling2448 eNotes educator| Certified Educator

An annuity is very different than a mutual fund; although, there is an intersection between the two. A mutual fund, to define that first, is an investment pool in which multiple individuals, perhaps many of the employees of a business, invest some of their income in a common account that is then invested in any number of activities, such as treasury bonds and the stock markets of the United States and, possibly, other countries. The "fund" hires a skilled professional to manage the allocation of money among different categories of investment. Diversification among multiple investment instruments is often a safe way of ensuring growth while minimizing losses in any one category. For example, the stock market is obviously an up-and-down form of investment. By investing some of the pool's funds in stocks while investing other funds in more conservative instruments like money markets and bonds, the funds' participants are protected against catastrophic plunges in stock markets. Such protection can come at the expense of larger earnings, such as when the stock market is doing well, but the trade-off is generally worthwhile as one approaches retirement age.

An annuity is a monthly or yearly payment to an individual from that individual’s retirement account, such as a pension or 401K savings plan. The aforementioned intersection between a mutual fund and an annuity, therefore, occurs when the individual investor retires and receives monthly or yearly payments from the fund or pension.

alanitram | Student

An annuity and a mutual fund are two types of investment tools which allows an individual to diversify their assets and can potentially offer long-term growth of funds. An annuity is a fixed sum of money paid to someone annually. It is a type of insurance in which the investor is entitled to receive annual payments. A mutual fund is an investment program funded by shareholders and the funds are invested in various securities such as stocks, bonds, money market instruments, and various other assets. The main difference between an annuity and a mutual fund is that an annuity provides insurance benefits in which a mutual fund does not have. With an annuity you are purchasing an insurance contract which ensures that you will receive annual payments. With a mutual fund, your funds are dependent on how your portfolio of securities are performing.