Emergency fund is very important to deal with sudden financial crisis. While investing in this fund, the focus should be on how quickly the money can come into hand rather than the returns. For this, fixed deposits, savings accounts and liquid mutual funds can be good options.
An emergency fund is very helpful to ensure that our financial planning does not get disturbed due to sudden big expenses. But often people are confused as to where to keep the money of this fund. This question is very important whether we should focus more on the returns from the money kept for emergencies or on how quickly the money can come into our hands when needed? Experts say that in the emergency fund, the most importance should be given to ‘liquidity’, that is, how quickly the money can be converted into cash.
What is emergency fund?
Emergency fund is the money we keep aside for unexpected expenses. Like, hospital expenses, car repair or sudden job loss. This fund helps us deal with difficult situations without disturbing our long-term investments.
Where to invest right?
Answering this question, SEBI Registered Investment Advisor Avinash Luthria says that ’emergency’ is not the same for everyone, hence where to invest money should also be decided according to the circumstances.
Avinash Luthria explains that for a sudden need like a hospital, money is needed immediately. In such a situation, fixed deposit (FD) is the most practical option. Money can also be kept in savings account, but generally people do not keep large amount in savings account. At the same time, it may take 2-3 working days to withdraw money from mutual funds. So, if you have a few days to spare, you can consider mutual funds. Especially liquid funds, overnight funds and arbitrage funds can give good returns.
Now let’s talk about tax. In case of emergency fund, tax should not be given first priority. The most important thing is how quickly the money can be received. People who fall in lower tax slabs can keep their funds in fixed deposits. At the same time, those who are in higher tax slabs can consider options like debt funds.