Time and again the importance of investing in mutual funds as investors if remain invested for a couple of years can reap the benefit of both rupee cost averaging as well as compounding that can enable a person to meet different long term financial goals. Not only this, if invested in wisely, mutual funds can help to meet short term financial crisis by enabling you create a contingency fund.
What is a contingency fund?
Usually for the salaried or a working professional, investment experts suggest to keep six months' salary or one's expenses aside as contingency fund to meet any exigency crisis and for it they suggest investment in a handful of liquid investments such as short term money market instruments or liquid mutual funds.
Mutual fund options that can build your contingency fund
While you may try to meet any of the exigency situation through borrowing or redeeming any of your investment, it is not deemed a right move in your overall financial prudence exercise as then the long term financial goals are hurted. So, here are suggested some of the fund options to mitigate the crisis:
1. Liquid funds: These funds park funds money in money market instruments with short term maturity and on exercising a redemption, the request is processed within a day's time in general. Some of the fund houses including the DSP BlackRock offers funds that enable instant redemption.
2. Ultra short term debt fund: These also provide a channel to create an emergency fund which can be redeemed at a short span say of six months to one year.
3. Arbitrage funds: This category is also advised largely due to the inherent tax advantage that comes with these fund and also as they carry no risk for the investors, the chances of capital loss is negligible and hence the investor can remain relieved.
Also, remember while creating a emergency kitty, what is more important is the fact that the investment can be drawn out with ease at the time of need and not the returns though returns should also be considered.