In the world of investing annuities draw comparisons to just about all other types of investments, especially mutual funds. While variable annuities draw the closest comparisons to mutual funds, the new kid on the block, indexed annuities are often weighed as an alternative as well, due largely to the fact that their returns are generated from stock market returns.

After that, the comparisons stop because they have little else in common. The commonality shared by indexed annuities and mutual funds is that they are both seen as investment alternatives that have the potential to earn returns higher than those found in fixed yield investments.

Mutual funds are professionally managed portfolios that invest directly into stocks, bonds, or a combination of both. They usually live in families comprised of a variety of different funds with varying investment objectives.

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One mutual fund family might have several stock funds that invest in different categories of stocks, such as Blue Chip stocks, international stocks, precious metals stocks, etc. The same for bond funds which can include government bonds, or corporate bonds, foreign bonds, or a combination.

Each fund is managed to specific investment objectives, and depending on the investment methodology and the composition of the portfolio, each is assigned a different level of risk. For small investors, mutual funds provide the best opportunity to invest in the markets in a way that can minimize their risk while generating higher returns.

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During positive market performances, mutual funds have been able to deliver solid double digit returns, sometimes for years at a time. During negative market performances, they have also been known to deliver double digit losses. So, investors in mutual funds need to be able to tolerate the sometimes wide swings in the markets on their way to achieving their accumulation goals.

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Indexed annuities were introduced as an alternative to fixed yield annuities, which, in annuities vs stock market interest rate environments delivered low rates of return. They are also seen as an alternative to variable annuities, which, like their mutual fund cousins, generate their returns with direct investments in the markets.

Indexed annuities have also seen their share of losses when the markets have declined. Indexed annuities are unique in that, while they do generate their returns from the stock market, they also protect the accounts from the losses. There is no managed portfolio. Rather, there is an accumulation account that is is metastock better than amibroker a fixed yield is based on the percentage change of a stock market index.

The yield will vary from year to year as the stock index moves, but it will never fall below a minimum rate. So, even if the stock index ends the year with a percentage loss, the accumulation account will not decline in value. The upside return is limited, however, in that the account is only credit with how to make money on unpaid maternity leave portion of the index change through what is called a participation rate.

Additionally, most indexed annuities have a rate cap that further limits the amount credited to the account. There are probably a lot of mutual fund investors who would love the notion of participating in the upside of the market without any downside risk.

But then, would they be satisfied with earning only a portion of the stock market return? Mutual fund investors enjoy favorable capital gains tax rates if they hold their fund shares for at least a year, but, typically, they pay taxes every year on income earned from their funds.

Any gains made in mutual fund accounts can be totally wiped out, and investors can lose ground in a steep market decline. The gains made in indexed annuities are, essentially, locked in every year so there is no chance for values to lose ground. For many investors, the ideal solution would be to include a mix of index annuities with a portfolio of mutual funds.

Most everyone needs to be able to earn higher returns over the long term to meet their retirement goals.

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Indexed Annuity Helping You Understand Indexed Annuities. Indexed Annuities Vs Mutual Funds In the world of investing annuities draw comparisons to just about all other types of investments, especially mutual funds. Mutual Fund Basics Mutual funds are professionally managed portfolios that invest directly into stocks, bonds, or a combination of both.

Indexed Annuity Basics Indexed annuities were introduced as an alternative to fixed yield annuities, which, in low interest rate environments delivered low rates of return. Which is the Better Investment? How Are Annuities Regulated Next Entry: