Emergency Fund – What, When and How?

An emergency fund is a sum of money set aside to meet unexpected, crisis period expenses. This money is meant to cushion a person’s immediate or short-term monetary needs arising out of unforeseen crisis situations. Typically this may mean creating a pool of money equivalent to 3 to 6 months of living expenses.

The focus here should be on safe-keeping of such amount and quick availability of funds at short notice. But more often than not, most individuals usually invest this money to earn returns. This exposes this safe corpus to volatility thereby compromising fund’s safety. So what should constitute an individual’s emergency fund?

Well, money kept in savings bank account or liquid funds are ideal places to park your emergency funds. The returns here may be low compared to other options, but remember that motivation behind an emergency fund is never income generation or earning a high rate of return.

Incase you’d still like to pursue returns with low risk exposure, you may opt for liquid fund or low duration fund which offer slightly better returns than savings account. Additionally, low duration funds offer instant redemption facility whereby one can redeem upto Rs.50,000 per day. Then there is no exit load in liquid funds. Don’t wait to create an emergency fund to help you tide over an unforeseen period of crisis.  «GM»