Life is uncertain and may take sudden turns which may cause financial turbulence. Emergency funds can bring financial stability and peace of mind in crucial times. Here, in this post we will together explore more about Emergency funds, why they are needed, the best emergency fund investment in India and more.
Table of Contents
What is an Emergency Fund?
An emergency fund is a reserve of money set aside to cover unexpected expenses or financial emergencies. This fund acts as a financial safety net, helping individuals and families manage unforeseen situations without the need to rely on high-interest debt or loans.
Emergency Fund Example?
Emergency or contingency can be of any type such as a sudden medical emergency, job loss, accident or something else. It can also be a situation mentioned below:
- No work because of accidental injury or other reason
- Sudden hospitalization for a long duration
- You cannot go to job/leave job because you have to take care of a family member
Why Is it Important to have an Emergency Fund?
Life may bring twists & turns to your financial life. These emergencies can disturb emotionally, physically, mentally and financially. When such situations arise, the economic impact is the worst. Thus it is always better to be prepared along with armour rather than be a victim.
You might have other investments, but these existing investments can have a lock-in period or you may incur losses in terms of penalty, low return etc.
Or investments might not be liquid.
Let’s make it more understandable with the help of an example.
Emergency Fund Example
Bestii 35, had good investments in mutual funds, life insurance, PPF, and PF. He had enough health insurance too.
But suddenly due to a major accident, he lost his job. Medical expenses were paid from a medical insurance policy. But, what about other day-to-day expenses?
Status of Existing investments in such case
- mutual funds – The market is declining right now. Withdrawal will cause loss and exit load
- Life insurance has a lock-in time.
- Withdrawal from PPF and PF is a little time-consuming process
Mutual Fund Taxation – How Your Gains Are Taxed?
Bestii Singh has not kept separate funds for such unforeseen events.
Looking at the condition he has to liquidate money from his savings.
Ultimately losing money in the below-mentioned ways:
- A penalty for early withdrawal
- Compromising on interest/return
- Consequently compromising on your future financial life goal.
How Much Emergency Fund Should I Have?
Ideally, a minimum of 3-6 months of living expenses are enough to fulfil such unforeseen situations. However, considering the corona-like situation in the recent past, one can aim for a higher corpus worth 12/ 24/36-month expenses.
These expenses include household expenses, utility bills, misc. expenses, insurance, loan EMI, mutual fund SIPs if any.
Where Should I Keep My Emergency Fund?
There are plenty of options to keep an emergency fund. But these investing options must be
- Highly liquid
- Safe investment
- Decent returns
Best Emergency Fund investment in India
The below-mentioned investments are highly safe, and liquid and provide good returns. These options can be chosen in combinations of 2/3 options.
- Saving Bank A/C
- Fixed Deposit
- Sweep in FD.
- Liquid or Money Market Fund
- Ultra Short/ Short Duration Fund
- Short Term Debt Funds with zero Exit load
How to build an Emergency Fund?
One can build an Emergency Fund by setting aside a part of income in a savings account/ SIP / Recurring deposit / Fixed Deposit or some other investments. If lump-sum saving is not possible then an Emergency corpus can be built by slow and steady investments periodically.
- Invest in a Recurring Deposit to build an emergency fund.
- Start a SIP
- Fixed Deposit
Conclusion
Emergency Fund is just like Plan B for unplanned sudden financial needs. This contingency money must be set aside to run your life expenses smoothly without any fuss.
If you are serious about wealth building, it’s better to take professional help.
You can always work with a Certified Financial planner and plan your finances, including Emergency funding, building a corpus for house purchase, and taking care of your health needs, plan a better retirement income in your second inning, leading to a more secure and financially stable retirement.
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