Investing is a smart way to plan for your future. It can help you achieve different financial goals such as saving for retirement, buying a house, or paying for your child’s education. But investing is not just about making money, it is also about being prepared for the unexpected. Life is unpredictable, and you never know when you may find yourself in a financial emergency. It can be a sudden health-related expense, job loss, or urgent home repairs, situations that can affect your finances.
While dipping into your investments to pay for these expenses looks like an easy solution, it can reduce your net returns and imbalance your long-term investment strategy. This is why most financial experts recommend creating an emergency fund which can cover up 3-6 months’ worth of your expenses. Now, you might wonder where to park this money such that it is easily accessible, safe, and still offers decent returns. Liquid mutual funds can help.
These debt funds invest in highly liquid debt securities and money market securities that mature within 91 days. Here is how you can use liquid funds to create an emergency fund and get financial security during uncertain times.
- Calculate the right amount to park in a liquid fund
The right amount to invest in liquid funds should be based on factors such as your monthly expenses, job security, and the number of dependents you have. Keeping 3 to 6 months’ worth of living expenses in an emergency fund is what most experts advise, but depending on your lifestyle and expenses, you may need to invest more or less.
For example, if you have a stable job and low expenses, you can maintain a smaller emergency fund. But, if you work in a field with high job insecurity or have many dependents, it is wise to focus on a larger emergency fund.
- Diversify your portfolio with different liquid funds
Although liquid funds are low risk investment options, they still have interest rates and credit risks. Investing in multiple liquid funds managed by different asset management companies can avoid concentration and spread your investments across different issuers and sectors. This way, the underperformance of a single fund will not impact your overall portfolio significantly, and you can protect your capital against potential market downturns or credit events.
Compare different AMCs to find the ones with a good track record of stable performance. Choose mutual fund schemes with low expense ratios and exit loads, as this will minimise expenses and retain more returns. Most importantly, prioritise high-quality securities to ensure maximum safety of the invested capital.
- Choose automated investment plans
By investing a portion of your monthly savings into a liquid fund via the systematic investment plan mode, you can keep your emergency fund separate from your daily accessible savings account. SIPs allow you to invest in mutual funds in a structured manner, with the flexibility to increase the amount through the step-up SIP option. This way, you can systematically build your emergency fund over time without having to make big investments upfront.
To wrap up
Emergency fund is a lifeline that can help you manage unexpected expenses without having to turn to debt or expensive loans. Using liquid funds is a wise and practical financial move to create an emergency fund.
With quick access to cash and higher returns than savings accounts, these mutual funds help you stay afloat during financial stress. Under the instant access facility of liquid funds, you can withdraw up to Rs. 50,000 per day with the convenience of same-day redemption and same-day credit. This helps you liquidate your investments and get funds whenever you need them.