Before you aim at building a corpus for wealth creation, experts time and again have put emphasis on creating a contingency or emergency fund and for determining its aptness or sufficiency to meet any un-timely crisis one need to weigh in one's annual expenses as well as the earning stream. For different individual categories below is mentioned the amount that will suffice as the emergency or contingency fund:
Business class: Individuals of this profile generally have a mix of asset class that can be liquefied at the time of crisis:
Professional class: Professionals for whom the income stream is uncertain but have to dealt with the day-to-day expenses need to maintain a minimum of a year's expenses so as to tide over any uncalled-for situation.
Salaried class: For salaried class, as per experts' recommendations, a minimum of 4-6 months' salary should be set aside as contingency fund.
And thereafter it is provided that basis the amount worked out to be enough, we have to channelize the funds into different investment products to fetch good returns while assuring high liquidity. Here in apart from the usual products such as basic savings account and sweep in bank account that offer the mix of features of three product class such as the current, term deposit and savings account, investor can park their fund in two of the less risky debt mutual fund category to ensure formation of emergency corpus.
Two things to keep in mind when targeting build-up of contingency fund via debt mutual funds:
First the debt mutual fund category is being sought to build corpus of such a sort as it protects capital though there is an element of risk attached. And hence as far as possible, investors need to check the risk profile of the selected debt fund category and ensure that it matches with the individual's risk taking ability.
Second, mutual funds enable investors to take the advantage of rupee cost averaging and compounding until the investment time and hence can park funds into the debt mutual fund space to meet contingency needs if the sum computed is over Rs. 5 lakhs.
An array of such funds and typically ultra-short term debt funds and duration fund with low risk can be chosen. By low risk, we mean there should be attached no credit risk i.e. the chosen mutual fund should be free of such securities with high credit risk; so that the NAV of your fund does not gets haywire.