Invest emergency funds in a systematic manner to earn some returns without compromising on liquidity and without taking any undue high risk
By Sneha Joshi
We all agree that we must have savings for emergencies. Life is unpredictable, especially post pandemic. Some days aren’t all filled with sunshine; hence, it is crucial to be prepared for the rainy day.
Here are five ways you can gear up to prepare for any contingencies.
List your monthly expenses
A good habit is to differentiate the expenses based on the necessity. Unavoidable expenses include rent, electricity, education expenses, groceries, clothing while expenses on movies, fine dining, luxurious vacation, etc., are discretionary. Prioritising expenses based on need and utility can help cut down unnecessary spending and increase the savings.
Determine emergency fund
A universal rule is to set aside three to six months of living expenses aside as a part of emergency funds. If your job is permanent and stable, you may opt for keeping aside three months of expenses as emergency fund, while if you have a part time employment or contractual job or a freelancer, you may want to have a larger corpus of at least six months of monthly expenses.
Planned saving of emergency fund
It is important to ensure that your emergency fund is accessible and liquid. However, keeping it in cash or in a saving bank account is not the best option, at least not the entire corpus. Invest it in a systematic manner to earn some returns without compromising on liquidity and without taking any undue high risk.
It is essential to invest for both short-term and long-term emergencies. A simple way to divide the emergency fund into near-term and long-term emergencies is by estimating the expenses to fund these emergencies. As investment for short term emergencies needs to be highly liquid, it is best to invest in a liquid fund.
As far as liquidity is concerned, liquid funds allow instant redemption facility. Up to Rs 50,000 can be credited to your linked bank account instantly.
Apart from liquidity, it is important to diversify and spread your emergency fund across different avenues that ensure quick accessibility while enjoying high returns.
For long-term emergencies, one way of investing it is to park some amount in a multi-asset fund. These funds allow liquidity with no exit load after one year of investment and are a comparatively better option as against a fixed deposit if the investment horizon is above three years.
The writer is associate fund manager, Alternative Investments, Quantum AMC