An emergency fund is a valuable asset that should be set up in case of a financial emergency. It is a reserve that you can use at a time of crisis or for unforeseen events, rather than for regular costs. As a result, you must tailor it to address any unexpected financial gaps that may arise. Being able to pay unforeseen expenditures is the most important aspect to consider when deciding where to maintain your emergency money. You should be able to get your money as soon as possible.
You shouldn't leave your emergency money exclusively in cash or a bank account once you've accumulated it. Even while an emergency fund should be liquid, it should not be used frequently. As a result, invest it in such a way that you get excellent returns without sacrificing liquidity. Spreading the emergency money across Recurring Deposits, Fixed Deposit, and Liquid funds are considered the best option among the investors.
A regular deposit with a scheduled commercial bank is the greatest strategy to establish an emergency fund. A recurring deposit instills discipline in your investment and provides you with a clear picture of how long it will take you to build up your savings. Leaving money in a savings account might lead to it being used for other things. The most crucial elements to consider while investing your emergency funds are capital security and liquidity. A recurring deposit is a great tool to start an emergency fund, but, it is not the best place to keep your emergency fund as emergency fund should be used in emergency and Recurring Deposits are for a long period of time, which make it not a good choice for Emergency Fund.
Fixed Deposit (FD)
The interest rate you can earn on an FD is higher than the interest rate you can receive on a savings bank account. However, It is also an investment for a long period of time, similar to a Recurring Deposit. It also provides strong liquidity because FDs may usually be liquidated the same day at a bank branch on a working day, and you can also liquidate it online on bank holidays if you do it using internet banking. However, there is a catch with Fixed Deposit, you will lose all your interest earned or get a penalty from the insurer. In addition, if you have offline FDs, you can use the sweep-in feature to have the FD immediately liquid anytime you withdraw cash, including on holidays.
Liquid Mutual Fund
Many experts recommend investing a portion of one's emergency money in liquid mutual funds, which are believed to be safer than other debt assets. They are known to provide a better rate of return than a savings account. However, keep in mind that cash may take 1-3 days to appear in your bank account, even if you make an internet withdrawal. While bank FDs have a deposit insurance cover of Rs 5 lakh, liquid money does not have this security. You can store a portion of your emergency cash in liquid funds depending on your risk appetite and usage.
Cash or near-cash instruments, such as a savings bank account or a liquid fund, should be kept in an emergency fund. While keeping money in an emergency fund, don't aim for a greater rate of return; instead, look for liquidity, safety, and capital protection. Because they are invested for a lengthy defined duration, FDs or Recurring Deposits are not suitable for an emergency fund. Because the money is needed in an emergency, an emergency fund should always be liquid. With your emergency fund investments, be sure you don't get charged with an exit load or a penalty if you withdraw early. The amount spent should not lose value and should generate outstanding returns.