/Should I invest Rs 7,000 monthly in liquid mutual funds or FDs to build an emergency fund?

Should I invest Rs 7,000 monthly in liquid mutual funds or FDs to build an emergency fund?

I want to invest Rs 7,000 per month. I intend to build this as an emergency fund. It should be liquid and earn better returns than conventional FDs. Please suggest a suitable fund.

Prableen Bajpai, Founder FinFix Research & Analytics says, “An emergency fund ensures that you have the requisite liquidity for a rainy day. It also insulates your long-term investments from unplanned withdrawals. Your contingency fund should cover a minimum of six months’ expenses, including EMIs as well as monthly investments. Based on your job profile and other liabilities, you can even maintain a corpus for one year or more. Liquid funds are among the preferred option for parking your emergency cash. However, if you are looking for slightly better returns with sufficient liquidity and ease, you can consider the ultra-short term debt funds. The portfolio of a liquid fund has a maturity up to 91 days while that of ultra-short duration debt mutual funds is between 3-6 months. Thus, ultra-short term funds come with a slightly higher element of risk. Any category of debt funds becomes eligible for indexation benefit after three-years, which make them tax-efficient. You can choose a scheme from a credible fund house. Avoid moving out of these two suggested categories in search of better returns for parking your emergency corpus since that will expose you to higher level of interest rate and default risks.”

I booked an under-construction property in Hyderabad in February and it is supposed to be handed over to me by January 2023. I took a Rs 52 lakh home loan for 20 years at an interest rate of 6.98% (floating). However, I want to repay my loan in 12 years. How much should I invest in mutual funds through SIPs to build a corpus enough to repay the balance home loan amount? Which mutual funds will you suggest for 12 years with moderate risk?

Naveen Kukreja, CEO and Co-Founder, Paisabazaar.com says, “Your outstanding home loan towards the end of 12th year of availing loan at constant interest rate of 7% would be around Rs 30 lakh. However, your home loan is a floating rate loan and there can be multiple interest rate regime changes, both rising and falling, during the 12 year time frame. Hence, I suggest you aim for a prepayment corpus of at least Rs 35 lakh, to be on the safe side. Assuming a 10% annualised rate of return from equity funds, you will need to invest Rs 13,000 per month through SIPs. You can invest in direct plans of any of these large cap funds—Mirae Asset Large Cap, Axis Bluechip, IDFC Large Cap and ICICI Prudential Bluechip —to build your home loan prepayment portfolio. Investing in direct plans would fetch you higher returns. If possible, top up your SIPs in large-cap funds with lump sum investments in case of steep market corrections. Doing so will fetch you more units at attractive valuations and help you create your target corpus sooner.”

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