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What is the difference between a mutual fund and an annuity?

A mutual fund is a type of investment that pools your money with that of other investors who have similar investment goals.  A professional money manager invests the money in stocks, bonds and/or short-term investments.  Each fund you select is managed with a goal of achieving certain objectives-including a certain balance of risk and potential return.  Your return depends on the performance of the various funds you choose.  In other words, your returns will vary.

Variable annuities are professionally managed investments that allow you to select a portfolio of investment options made up of stocks, bonds, and short-term investments.  With a variable annuity, your investment return is also a function of the specific investments-or subaccounts-you choose.  Again, your returns will vary.  It's up to you to select subaccounts that suit your investment objectives and risk tolerance.  However, unlike mutual funds, most variable annuity contract will offer you a guaranteed death benefit and distribution features that can help protect your assets.  (Review your contract to see if the guaranteed death benefit applies to your particular variable annuity.)

A fixed annuity lets you lock in a guaranteed rate of interest for a specific period-normally between three months and one year.  As each "guarantee period" comes to a close, the insurance company sets a new interest rate for the upcoming period.  Interest rates and time periods vary depending on the annuity contract.

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  1. Martha Hinojosa

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