Emergencies happen suddenly, without any notice, and can devastate the survivors both financially and emotionally. When these emergencies happen, you can use up a lot, or even all, of the money that you have diligently saved over the years. Sometimes, you might have to sell your investments quickly and may be at loss. You might even have to borrow to tide over the crisis.
It is in emergencies that an emergency fund, money earmarked solely for this purpose, is of great help. It goes without saying that an emergency fund needs to be available for use. Debt funds (liquid funds, ultra-short term funds and money market funds) offered by mutual funds can be considered to create an emergency fund since it offers that you need from an investment meant for emergencies.
How Mutual Funds Help
Debt Funds (liquid funds, ultra-short term and money market funds) invest in Debt & Money Market instruments that have maturities ranging from 91 days up to 1 year. This enables the funds to keep the returns stable and less volatile and provide you to the facility to access your money quickly, usually within 1 – 2 business days. Further, they have the potential to earn more returns than a typical savings bank account.
Find Out the Right Amount 0f Emergency Fund
As a rule of thumb, 3-6 months’ household expenses can be one’s emergency fund depending on your personal circumstances. Basically, any amount that gives you the confidence to combat emergencies in your household could be enough, for anything more can actually affect the returns of your portfolio of investments. Of course, the amount increases with needs such as a special needs child at home or an elderly family member with a medical ailment.
Use SIPs To Build An Emergency Fund
For many people, it is very difficult to build an emergency fund at one go. Here again, debt funds are helpful since you can invest in them through Systematic Investment Plans (SIPs) where you can build emergency fund through regular investments. SIPs are easy on your pocket, as you can invest a fixed amount on a predefined date every month that’s convenient to you. For instance, if you save 10 per cent of your monthly salary of Rs 60,000, in five years, you can accumulate more than Rs 3.6 lakh. That can act like a cushion for a sudden uninsured medical emergency or a gap period in employment. Of course, the emergency fund needs to work in tandem with various insurance plans to provide adequate protection and increase with time in line with an increase in your income and expenses. While liquidity and safety is of greater importance for emergency funds, you can ensure that even this money has the potential to grow by choosing the debt funds. Many mutual fund investors associate mutual funds mostly with equity funds however, with debt funds, they have a stable investment option available by their side in the worst of times.
Disclaimer
Investments made in mutual fund schemes carry market risk and there is no assurance or guarantee that the objective of the schemes will be achieved. The calculations shown are for illustrative purposes and based on the #mean of 10 years rolling returns of the benchmark i.e., 10-Year G-Sec between June 1, 2013 – May 30, 2023: 7.20%. *The inflation rate for the emergency fund i.e., 5.22% has been based on average inflation of the last five years (Source: macrotrends), which may vary. Past Performance may or may not be sustained in the future and is not a guarantee of any future returns. The final value of investments is pre-tax, and investors may incur tax liability on capital gains based on prevailing tax laws at the time. The above calculations do not consider stamp duty / statutory taxes / levy that may be applicable and are shown purely to demonstrate the benefit of SIP to build an emergency fund and is not an assurance of return or guarantee protection against loss in a declining market. Any calculations made are approximations meant as guidelines only, which need to be confirmed before relying on them. These views alone are not sufficient and should not be used for the development or implementation of an investment strategy. Please consult an investment adviser before making an investment decision.
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.