Here’s How You Can Create An Emergency Fund Using Liquid Funds

An emergency fund is an important corpus that could prove to be a lifeline in critical situations which require urgent requirement of cash, or easy and hassle-free access to funds. This is the fund you could fall back upon in times of such crisis or unforeseen circumstances. Here’s how to go about creating an emergency fund to take care of such contingencies.
 

How To Start Investing In Liquid Funds?

Liquid funds are more suited for investors who have an investment horizon of about a month to three months. In personal finance, ‘liquid’ means anything that is almost as good as cash. Money market funds or liquid funds, as they are commonly called, are one of the safest places to park your money for short periods of time. 

Typically, these funds invest into money market securities and debt securities that mature in 91 days. 

Says Shweta Jain, a financial planner, and CEO and founder of Investography, a financial planning firm: “One could start investing in liquid funds by doing the ‘know your customer’ (KYC) norms, and choosing a fund which has high quality papers. It is better to stick to bigger fund houses at first. Also, see if there are equity funds, which are performing well in the fund house. In case you would need to move your funds later to equity, it would be easier.”

Do Liquid Funds Give Higher Returns Than Savings Account?

Over the past years, liquid funds have fetched returns of up to eight per cent. These are definitely higher than what you would earn from a savings account or fixed deposits.

“Usually, liquid funds give higher returns than savings bank account. That said, that shouldn’t be the only reason why you should invest in liquid funds. Money that is in the bank, gets spent, and hence, it is important to move it to a place which will protect it from unnecessary expenditure. The fact that it also earns higher interest than a savings bank account is a bonus,” says Jain. 

Also, you could park your short-term money into liquid funds, as they are more tax-efficient than the interest one earns from savings accounts. That said, people do not keep their money parked in liquid funds for three years.

“Some of the benefits of parking money into liquid funds are zero exit load on withdrawals, safety, and low expense ratio,” says Hemant Beniwal, certified financial planner and director at Ark Primary Advisors, a financial planning firm. 

How To Build An Emergency Fund By Investing In Liquid Funds

There are certain rules that one must follow while creating an emergency fund. In case you have a fairly stable job and a spouse who is a homemaker, you should aim to keep around six months of monthly expenses in your emergency fund. 

In case you have a stable job and a working spouse, you can keep at least four months of monthly fixed expenses in your emergencies expense fund. On the basis of this rule, you can calculate your emergency fund requirement, and park the funds either in lump sum if available in a saving account, or a mutual fund liquid scheme.

“You can direct a portion of your monthly savings through the systematic investment plan (SIP) mode to a liquid mutual fund scheme. This will help you to maintain your emergency fund separate from your daily accessible savings account. In case of an emergency, the money invested in this scheme on redemption will be credited to your account in T+1 (transaction date +1) business day. Also, investors should consider low duration or short-term funds for emergency fund, as they may not touch that money for many years,” adds Beniwal.