The COVID-19 pandemic has made people realise the importance of having an emergency fund. Also known as a contingency fund, an emergency fund means a specified amount set aside for emergencies that arise unexpectedly such as a job loss, pay cut, or a medical emergency.
Ideally, market experts say that one portion of savings must be parked to meet such emergencies. A typical thumb rule requires that such an emergency fund must meet 6-12 months of survival needs.
"While it's smart to always let the money earn the best returns possible, this is an exception where the speed and assurance at which individuals can access the funds are more desirable than the rate of return,” stresses Yashpal Sharma, vice president of Taurus Mutual fund.
Here are some of the best options to create an emergency fund:
Emergency funds must be readily accessible; therefore investors should necessarily invest in liquid instruments.
Liquid instruments offer unhindered access to fund.
In this scenario, the first thing that comes to mind is a savings account.
People who are not comfortable with debt instruments can use a savings account that offers a high rate of interest with no minimum balance requirements for parking emergency funds.
Flexible bank fixed deposits (FDs)
FD, being a secure investment, can also be used as an emergency fund investment. In any unforeseen requirement, fixed deposits can easily be converted to ready cash.
According to Sharma, one of the best parking places for this fund is an overnight fund, which is a very short-term mutual fund.
Other liquid funds
Investors can park around 30-50 percent of the investible corpus in liquid funds as they offer high liquidity along with better returns than a savings account.
"By investing a sizeable part of the emergency fund in these schemes, liquidity is ensured since investors can redeem within a couple of days. Average returns on liquid funds hover around the 6-8 percent mark. With low risks and an opportunity to earn good returns, these funds can help in creating the corpus in a shorter period,” said Harsh Jain co-founder and COO Groww.
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