Topic 2: Do You Have An Emergency Fund?

You can invest in a liquid fund or bank FD to build a corpus equal to 3-6 months' expense which could be used in case of medical exigency, job loss etc. An often neglected financial goals among people is building an emergency (contingency) fund. It's a must have for every individual because one never knows when there could be a need for some extra money due to some unforeseen event. To build an emergency corpus, you should invest in those instruments which you can redeem or liquidate within a very short notice. Putting some money in a bank fixed deposit is one of the solutions. Investing in a liquid fund or an ultra short term fund of a good fund house can also serve the same purpose.

When To Use A Contingency Fund:

  • An emergency fund is needed when one’s regular source of income dries up and yet there’s a need for some funds to meet the daily expenses
  • It could be used to meet some medical emergency
  • One could use it to tide over some months in case of of job loss or setback in business
  • In such situations one should be able to tap into a corpus without curtailing regular investments
  • Usually regular investments are for meeting long term financial goal’s like child’s education, own retirement, etc
  • The optimum size of an emergency fund should equal the monthly expenses of three-six months
  • Liquid funds have the advantage over other comparable investments in terms of lower taxes and anytime withdrawal without penalty
  • Returns from these funds are hardly affected by short term interest rate volatility
  • 9.Very soon instant withdrawal, up to certain limits, will also be possible from these funds

Some Do’s & Don’t’s:
  • Never keep money in an equity fund to build an emergency fund
  • For an aged person without a medical insurance, the contingency fund should be a large one
  • For a young person with a regular salary income and a mediclaim, it should be used to meet daily expenses if cash flow stream is disturbed


Source: Economic Times

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