Why you need an emergency corpus and where to invest your money to create one

Nov 01, 2021, 04:04:24 PM IST

What is an emergency fund?

When it comes to our personal finances, many of us have changed the way we view our money matters. A recent survey done by Scripbox, a digital wealth manager, found that creating an emergency fund has emerged as the top financial goal in the current environment. So what is an emergency fund? It is a contingency fund that not only helps financially during most difficult times but also prevents the derailment of your saving for long term goals.

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Why is an emergency fund important?

Simply because emergencies and the ensuing financial burden cannot be anticipated. In these last couple of years, many of us have seen grave emergencies, including job loss, pay cuts, death of a family member and so on thanks to the novel coronavirus pandemic. Loss of income and medical emergencies can mean that one will have to turn to their emergency fund to tide through the tough times. Thus, it is important to have an emergency fund to fight any exigency. An emergency fund is a contingency fund that not only helps financially during most difficult times, but it also prevents the derailment of your saving for long term goals.

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How big should the fund be?

Where to park your money?

The primary objective of your emergency fund is to help you when you need it the most without any delay. While some emergencies may give you a few hours or days to prepare, others may require funds immediately. Therefore, your emergency corpus must be easily and quickly accessible in the form of cash or in the savings bank account. A part of the funds can also be invested in liquid mutual funds that invest only in money market securities and therefore carry low risk. FDs or RDs can also be considered. Here are some advisable instruments.

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The basics: Savings bank account or cash

One-month expenses as a reserve can be kept in a combination of saving bank account and cash. Though cash is highly discouraged, there are many emergencies when it is the only option. Many natural disasters like storm, excessive snowfalls etc. may impact internet connection and so digital payment options may not work. Therefore, it may be a good idea to keep some amount cash to manage 7-10 days expenses. Rest you can keep in your saving bank account.

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Something is better than nothing: FDs

If you keep the remaining amount in fixed deposits (FDs), the interest rate you can earn will be higher than what you get on a savings bank account. It also offers good liquidity as FDs can typically be liquidated on the same day on a working day at a bank branch. If you do it through online banking, you can liquidate it online on bank holidays as well. However, if you have offline FDs you can take a sweep-in facility where the FD can be broken automatically whenever you withdraw funds even on holidays.

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And then some equity: Liquid mutual funds

Many experts advise people to keep a part of their emergency fund in liquid mutual funds as they are considered to be safer than other debt investments. They are typically known to deliver a higher return than a saving bank account. However, you need to remember that even an online withdrawal may take 1-3 days for funds to be credited in your bank account. Some mutual funds offer ATM card facility which allow up to Rs 50,000 per day, per scheme withdrawal. While bank FD enjoys a deposit insurance cover of Rs 5 lakh there is no such protection available with liquid funds. Depending upon your risk appetite, you can keep some part of your emergency fund in liquid funds.

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Why you need an emergency corpus and where to invest your money to create one - ​What is an emergency fund? (2024)

​What is an emergency fund?

​Why is an emergency fund important?

​How big should the fund be?

​Where to park your money?

​The basics: Savings bank account or cash

​Something is better than nothing: FDs

​And then some equity: Liquid mutual funds

Why you need an emergency corpus and where to invest your money to create one - What is an emergency fund? (2024)

What is an emergency fund?

Why is an emergency fund important?

How big should the fund be?

Where to park your money?

The basics: Savings bank account or cash

Something is better than nothing: FDs

And then some equity: Liquid mutual funds