An emergency fund is an account of funds set aside in order to meet uncertain future events. The event may arise due to any of the following unforeseen events arising out of the loss of a job or a major repair in the home or critical medical illness or delay in income or death of a family member and so on.
Emergency Fund is a kind of fund which comes in handy during turbulent times or whenever a state of financial emergency strikes. This fund acts as a back up to rely on during the period of unforeseen situations. It is considered as a liquid fund.
The tenure of the emergency situation may either last for a short-period of time or can last for longer period.
A short-term emergency can be handled easily as compared to the long-term emergency period.
For businesses, especially small firms, the emergency fund is a must and forms the most essential part of the business as it offers security other than liquidity.
In India, most of the people save their money and invest it in the medium and long-term funds and give little or no importance towards maintaining an emergency corpus funds. The general trend in India reveals that people invest there saved money in shares, mutual funds, bonds, banks, gold and in post office schemes.
Awareness has to be created among the investors to create and maintain an emergency fund to meet the unforeseen future events.
Benefits of Emergency Corpus:
• Emergency funds can help an individual to avoid debt and rely on one's own money to meet the sudden expenses.
• If an individual is the only sole breadwinner of the family, then these funds come in handy in during an unexpected job loss.
• One can rely on these funds whenever a critical medical emergency situation arises.
• In case of Self-employed, then it is mandatory to manage good emergency funds saved up.
• Emergency funds come in handy at the time of repairs be it a plumbing or car repairs or painting work and so on.
• If you are working towards a goal of owning a home or starting a business, the emergency job can stop you from dipping those savings money when any unexpected expenditure crops up.
The Business plan of an enterprise should always include provision for an emergency fund. One has to understand the importance of how to use these funds.
Emergency in business could arise out of any of these reasons -
• An economic downturn
• Crisis either in the domestic and international market
• Sudden volatility in the market
• Personal disability
• Critical health emergency
• Natural disaster and so on.
Now the question arises as to how to maintain an emergency corpus fund?
Similar to one's personal account, all the individuals, irrespective of income level can maintain a separate emergency account which has to be used only during the distress period. The thumb rule is one should not touch the amount deposited in this account for any other reason apart from an emergency one.
One can park emergency funds in the savings account, as it can be withdrawn easily whenever required and it is considered to be the best option out of the various available investment alternatives. The savings account in all banks in India offers 4% interest per annum and thus the investor will earn interest amount along with the invested amount.
If the funds are parked in fixed deposits, then it may attract a premature penalty if the money has to be withdrawn well ahead of the maturity period. Investing in mutual funds is also considered risky, as the returns on the investment depends on the market performance.
The amount to be maintained in the emergency corpus has to be decided by the individual since it is based on the savings of the individual. It is better to save around three to four months salary of an individual and lock in the emergency corpus account and treat it as an emergency fund.