The Covid-19 pandemic has once again emphasised the need to build a contingency fund worth 6-9 months of monthly expenses
WHAT IS EMERGENCY OR CONTINGENCY FUND?
Often, there is an urgent requirement of money – for example, a health crisis, hospitalisation, or something less serious but nonetheless equally expensive. To meet these needs, you either need to borrow or have your own kitty kept aside. Financial planners suggest building an emergency fund, which is a stash of money kept aside to cover such situations.
WHAT IS THE BENEFIT OF HAVING AN EMERGENCY KITTY READY?
When a financial emergency arises suddenly, one would have to take a loan or borrow from family or friends, which could be embarrassing at times. Having an emergency kitty ready saves you from doing this. It also saves you from breaking into your investments such as equity mutual funds, shares or longterm investment products that have been done with an objective to meet a particular long-term goal. Being prepared with an emergency fund gives you the confidence to tackle unexpected events without worrying about money.
HOW BIG SHOULD THE FUND BE AND HOW TO BUILD ONE?
While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, financial planners believe one should have a kitty worth six to nine months of monthly expenses. They suggest using debt mutual funds as the best way to build this corpus. Investors can build this slowly or over a period of time through systematic investment plans (SIP) or lump sum savings. Windfall gains, be they the annual bonus or a performance incentive, can be used to create this corpus. Investment can be made in a mix of debt funds –liquid funds or ultra-short-term mutual funds. In case of an emergency, investors can redeem and get the proceeds within 1-2 working days.
HOW HAVE THE PAST RETURNS IN LIQUID OR ULTRA-SHORT-TERM FUNDS BEEN LATELY?
As per data from Value Research, over the last one year, the liquid funds category has given an average return of 3.54 per cent, while the ultra-short term funds category has given 4.54 per cent