Emergency fund

Emergency fund

Do you have an emergency fund?

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

  1. 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
  2. It could also be used to meet some medical emergency
  3. On could use it to tide over some months in case of a job loss or some setback in business
  4. In such situations one should be able to tap into a corpus without curtailing regular investments
  5. Usually regular investments are for meeting long term financial goals like child’s education, own retirement etc.
  6. The optimum size of an emergency fund should equal the monthly expenses of three-six months
  7. Liquid funds have the advantage over other comparable investments in terms of lower taxes and any-time withdrawal without penalty
  8. Returns from these funds are hardly affected by short term interest rate volatility
  9. Instant withdrawal, up to certain limits, is also be possible from these funds

DO’s and Dont’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 regular salary income and a mediclaim, it should be used to meet daily expenses if cash flow stream is disturbed

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2 Replies to “Emergency fund”

  1. Sir,
    I beg to differ a bit. Contingency fund should be parked in Liquid Funds not in FDs as Liquid funds offer superior liquidity compared to bank FDs. Bank FDs would penalize you for pre-mature withdrawal.
    Liquid fund returns in the last three years have been quite impressive with the category averaging 8.9 per cent on an annualized basis. But going forward market liquidity could decide rates.

    1. Yes, Liquid Funds are superior than FD to park emergency fund. Article main focus is need to build emergency fund. Next Week you will get another article on ‘Build a emergency fund through a liquid fund’ that will highlight this point.

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