Emergency Funds
// Emergency Funds
Why We Need Emergency Funds
An emergency fund is a vital component of your financial plan. Storing some money specifically for a contingency can ensure that you do not spend your long term savings or end up in debt over short term expenses. Losing a job or coming face to face with a medical emergency can force you to dig into your savings pool. For example Covid situations has lead to job losses for employees and affected cash flows of business persons.
Simple Thumb Rule - Emergency Funds
A simple thumb rule : At least build a corpus to meet the 6 month expenses.
Example: Monthly Expenses Rs. 25000 * 6 Months = Rs. 1,50,000 is the Emergency Corpus
Suppose you have your Rs.1 lakh accumulated as your emergency fund. What you can now do is keep Rs.20,000 in cash at home, let Rs.30,000 stay in savings bank account and invest the remaining Rs.1,00,000 in a liquid or ultra-short mutual fund schemes.
Hence, invest it in a manner that you earn decent returns from it without compromising on liquidity. The ideal thing to do would be to spread the emergency fund across liquid funds, short-term RDs and debt mutual funds.
Do you know ?
A liquid fund is a class of debt funds that invests in debt instruments of less than 91 days maturity. These debt instruments are high-rated papers and are not affected by interest rates. Hence, they earn decent returns without being volatile.
