Life is unpredictable. Emergency situations like medical emergency, sudden job loss, urgent home repair, family emergencies or unexpected travel can disrupt your financial planning without warning. This is where an ‘Emergency fund’ becomes your strongest financial safety net.
What is an Emergency Fund?
An emergency fund refers to - money set aside to cover unexpected but necessary expenses. Its purpose is to have quick access, capital safety, and peace of mind rather than earning high returns. It is a fund used in uncertain circumstances so that you don’t have to disturb your long-term investments or take a high-interest loan.
Why Emergency Fund Planning Is Important?
Many people assume insurance or credit cards are enough inunexpected situations but sometimes they are not the right substitutes in emergencies. Insurance have waiting periods for claiming amount and credit cards sometimes are not accepted everywhere and may charge interest rates around 0.71% to 3.99% per month depending on the bank, if we fail to pay on time whereas emergency fund covers immediate cash needs and often no paperwork needed.
Having an emergency fund ensures-
- Financial stability during crises
- No panic selling of long-term investments in between
- Avoidtaking high-interest debt
- Mental peace and confidence
Hence, having a well-planned emergency fund acts as a shock absorber for your finances. For example, you can relate this to a situation like Covid pandemic.
How Much Money to Keep in Emergency Fund?
As a basic rule for emergency savings is to save enough to cover three to six months of essential expenses. However, it also depends on your income stability, number of dependants and your lifestyle. For example - for an individual living in tier-1 city, if monthly expenses on essentials are around ?50,000, 6 months’ expenditure comes to ?3,00,000; which becomes his target emergency fund.
Where you can Invest to Build an Emergency Fund?
Now, before choosing where to invest, remember that the investment options should have liquidity, safety of capital and stability of value.If any of the investment option fails these features, it’s not suitable for emergency funds. Nowlet’s explore some of the options, starting from most accessible order:
- Cash and Bank deposits-
The simplest access to immediate needs is perhaps cash. As such one should always have some cash in hand or in a savings account; as they are accessible 24*7.A savings account has no time restriction or maturity period. As long as you keep money in the account, you will receive interest. The minimum interest rates in savings account offered by various private, public and small finance banks ranges between 2.50% p.a. to 5.50% p.a. for deposits up to Rs1 lakh; and for balance above that, rates may differ depending on the bank.
You may keep around 25% of the emergency fund allocation in this deposits due to its instant access and easy to operate feature.
- Overnight Funds invest in securities maturing in just one day and have no exit loads, you can redeem next day.
- Liquid Mutual Funds-
These are low-risk debt funds that invest in short-term money market instrumentswith very short maturity periods, often less than 91 days. These instruments can include government securities, certificates of deposit, commercial paper and more. You can invest by SIPs or a lump sum amount. For redemption, if you redeem between 1st and 6th day, liquid funds may charge an exit load, however no charges are levied from 7th day onwards.
They are ideal for those seeking to park their funds temporarily; whether for emergency savings or to meet short-term goals.
- Ultra Short Duration Funds-
These funds aim to provide liquidity and seek to generate returns by investing in a mix of short term debt and money market instruments. These funds aim to invest for an average of 3-6 months and depending on your horizon, returns may vary. It is suitable to invest here if you want slightly better returns and have extra savings.
For information regarding cut-off time and applicable NAVduring purchase and redemption of units, you can visit-
https://www.amfiindia.com/investor/become-mf-distributor?zoneName=InvestorService
Use Expert Guidance:
Reliable AMFI registered mutual fund distributor like Money Honey Financial Services Pvt. Ltd. can help you to invest for an emergency fund by analysing your financial situation.
Things to Remember:
- Emergency funds should never be linked to market timing.
- First focus on liquidity and safety of funds and then if you want to improve returns, you may do it under the guide of expert.
- Review your emergency funds in events like after marriage or childbirth, after salary change or even once in a year.
Conclusion:
An emergency fund isn’t about expecting the worst; it’s about being ready for it.Having an emergency fund is one of the first steps in your financial planning, without it even the best investment strategy may collapse during a crisis.Your emergency fund planning must reflect age, lifestyle, liabilities, and career stability and should not be done just by formulas.
Even if you don’t incur an unexpected expense for years, you’ll still benefit from knowing that you have a comfortable cushion in bad event.So start planning today; to be future ready for uncertainties.
Disclaimer: This report is prepared in his personal capacity and neither the Author nor Money Honey Financial Services Pvt Ltd assumes any responsibility or liability for any error or omission in the content of the article. Investments in mutual funds and other risky assets are subject to market risks. Please seek advice from an investment professional before investing.