Emergency Fund: What is it, why to have it and where to invest it?

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August 5, 2019 2:31 PM

An emergency fund is something that you can rely on and access during a crisis or for unexpected and unplanned scenarios, to meet your regular expenses.

emergency fund, contingency fund, emergency fund with mutual fund, mutual fund, debt funds, liquid fund, short duration fund, overnight fund, financial planningTo avoid such circumstances, you can set up a contingency fund, for rainy days as such.

Lay-offs in the information technology firms or startups are not a new thing. However, today no sector is immune to lay-offs. For instance, the Jet Airways episode that took place a few months back not only put many employees out of job, but also in deep financial trouble. Thankfully, other than giving in to your depression in the event of a lay-off, you can prepare for such an eventuality and make the necessary arrangements accordingly.

To avoid such circumstances, you can set up a contingency fund, for rainy days as such. Having an emergency fund ensures that you can at least keep paying your EMIs, take care of non-discretionary expenses, and also continue paying premiums for your insurances.

A contingency/emergency fund is an amount of money that one keeps aside for sudden emergencies. It is something that you can rely on and access during a crisis or for unexpected and unplanned scenarios, to meet your regular expenses.

Need for Emergency Fund
One of the most critical features one should keep in mind when choosing to park one’s emergency fund is that an emergency fund should be liquid. This is because in case of a crisis one should be able to withdraw the money when one needs it without any delay.

Experts suggest investors should also ensure that they do not get charged pre-withdrawal penalty fee or get penalized in the form of an exit-load. The value of the amount invested should deliver guaranteed returns, and not go down either.

The emergency fund is built gradually, and can’t be accomplished overnight. You need to set aside a particular amount every month in a separate bank account, and not use it for your regular expenses, which will grow into a suitable emergency fund that you maintain. For instance, if you have decided to have a contingency fund of Rs 1 lakh, you need to put aside Rs 5,000 or Rs 10,000 every month until you build your corpus.

Size of your Emergency Fund
The amount size of an individual’s emergency fund is decided depending on their income and expenses. Generally, it is suggested to maintain an emergency fund which can be 3 to 6 months of an individual’s monthly income.

The emergency fund is also divided into 2 categories; long-term emergency funds and short-term emergency funds. Long-term emergency funds are where one can save for large-scale emergencies like a sudden medical emergency or a major natural disaster and are invested where the interest rate is higher. Short-term emergency funds are the fund that you might need in cases of immediate emergencies and offer little in terms of interest.

Where to park your money
After you have accumulated your emergency fund, it should not be left in the form of cash or in the bank account, or not entirely. It should be invested in a manner that you not only keep it in partial liquid form but also earn decent returns from it. According to experts, one should spread the emergency fund across liquid funds, debt mutual funds, and short-term RDs.

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