Annuity Versus Index Fund

By Compuquotes Team on March 27th, 2008

Investing is often best left to the experts. However, if you have a little money on your hands and would want to try it out, you need to at least know the basics. For example, if you are looking at retirement a few years down the road, you are considering several investment options probably. You may be looking at annuities or mutual funds. Is there a difference? How will annuities fare versus index funds in the first place?

Annuities are very useful in lining up your retirement options. They allow you to save for the future and help you defer tax payment to optimize your investment's earnings. They allow for provision of lifelong income to you and even to your spouse alongside you. Annuities can guarantee returns and rates and manners of payment. You can go for a fixed annuity to guarantee you a sure rate of return or a variable annuity that gives the best returns at finger-tip flexibility for you.

On the other hand, index funds are mutual funds with clarified ownership terms. They are also good choices for investment when they are professionally managed. They allow for diversity as in targeting different sectors or industry, different fund vehicles or instruments, while at the same time keeping in mind your investment objectives. Index funds, regardless of what is happening in the market elsewhere around the globe, are fairly constant and fixed as predetermined. Although coined after an index of several types of funds, an index fund does not necessarily follow any rules or indices except those predetermined by ownership. The diverse lot allow for compensating for one fund's weakness by another's strength within the portfolio. Index funds will allow investment managers to go for equity, income, or sector investments.

The advantage or disadvantage of investing in an annuity over an index fund will have to depend on the openness and readiness of the investor to risk, the sensitivity to risk of the sector invested in, the investment objectives, and the time consideration (as in the case of older clients versus younger ones).

Index funds are limited to the indices they are tied up with, thus there is not much flexibility. But the upside is practically no huge investment management is involved and this translates to minimal investor costs. But since index funds are market-driven, it can be volatile at times and inexperienced investors may be too worried at how their index funds react to the market.

While annuities provide much flexibility and foreseeable returns, index funds are much more restricted and highly dependent on, at times volatile as, the market. While index funds may be low-cost and low-maintenance, the passive way of managing the fund (simply comparing or indexing) may prove to be successful at times, too.

Given a choice between index funds and annuities, what will your choice be? Granted that both will have inherent advantages and disadvantages, you need only to revisit the basics in investing - what are your investment objectives, do you want the money later or earlier, will the benefits be for you alone or with others, how much are expecting at retirement, how long will you need income payouts, and a host of other questions that will have to be really weighed before you finally decide as to the annuity versus index fund choice.

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