1. What are emergency or contingency funds for?
Many a time in life there are situations where you need money immediately. For example, if you lose your job, if your car breaks down or suf fers a major accident and needs to be re paired, if you or a family member need to be hospitalised, or you need to travel urgently . At such times, you need cash im mediately often in a day or two. To meet these needs, you either need to borrow or have your own kitty kept aside.
Financial planners suggest building an emergency fund, which is a stash of money , kept aside to cover such situations.
2. What is the benefit of having emergency funds?
Having an emer gency kitty ready, serves the purpose and saves you from taking a loan from friends or relatives, or overdrawing on your credit card. It also saves you from breaking into your investments such as equity mutual funds, retirement corpus or any other long-term in vestment products done to meet a particular long-term goal. Being prepared with an emer gency fund gives you confidence you can tack le any unexpected events without adding events without adding money worries. It also inculcates a savings habit rather than spend ing cash frivolously.
3. How big should an emergency fund be and how to build one?
Financial planners believe you should have atleast 3-6 months worth of expenses as an emer gency fund. They suggest using debt mutual funds as the best way to build this corpus. Investors can build this slowly or over a period of time. If you have just started working, you can also use the systematic investment plan (SIP) route to contribute and built this corpus. You can also add lumpsum amounts as and when you have some spare funds. Financial planners also suggest you could add windfall gains such as an annual bonus to create this corpus. Investment can be made in liquid funds or ultra short-term mutual funds. The portfolio of such funds consists of commercial paper, deposits, T bills and other short-term debt making it the least volatile amongst MFs. In case of an emergency , or when one needs money , a redemption request can be made to the fund house and you can get your money in 1-3 working days.
4. How much can you earn in liquid or ultra short-term funds?
Rather than keeping your money idle in a savings account where you earn 4% (paid by most banks), investments in liquid and ultra short-term funds, generally give you higher returns. As per data from Value Research, over the last one year, the liquid funds category has given an average return of 7.05%, while the ultra short-term funds category has given 7.97%.