What is an emergency fund and why do I need one?

This financial emergency could be in the form of

• Medical expenses
• A job loss
• Repair work to your home or car
• Unexpected travel expenses
• or any other tough time.

2020 taught us the importance of saving for uncertainties, when unemployment rose and people started redeeming from their investments and increasing their debts. Having an emergency fund keeps you away from tapping into mutual funds reserved for long term goals.

How much to save

It is recommended that you need to have enough money at your disposal that can keep up with your consumption pattern for ideally 12 months. If your monthly expenses are Rs 50,000 then your emergency fund should save 50,000x12 = Rs.6,00,000 for your emergency fund.

However, the size of your emergency fund will vary depending on your lifestyle, monthly expenses, income, and financial dependents. Those who have EMIs or higher monthly expenses might need to start building a larger emergency corpus. If you have no financial obligations or if you are young, you can reduce your weightage to six months’ worth of expenses.

Where to invest

Follow the SLR (safety, liquidity, and return) philosophy while building this corpus. Consider financial instruments that prioritizes safety and liquidity of your money over returns. Consider bank deposits and liquid funds (with a short duration of 3 months) for building your emergency corpus. Those who are beginning to save can start with one month and then gradually build it up from there. As per SEBI norms, liquid funds invest in debt and money market securities with maturity of up to 91 days. The invested money is parked in market instruments such as Certificate of Deposits, Commercial Papers, Term Deposits, Call Money, Treasury Bills, and so on.

Things to consider when building your emergency corpus

 Liquidity: Liquidity refers to how quickly your investments can be converted to cash. Invest in instruments that does not attract high penalties or exit loads.

1. Safety: Avoid saving in instruments that have high risk for capital erosion, instead, prioritize safety over returns.
2. Co-relation with other asset classes: Your investment portfolio has several asset classes, it's important to evaluate how your emergency fund fits in with the rest of your portfolio.
3. Risk appetite: If you are conservative and have a low threshold for risk, you might want to consider a higher sum dedicated to your emergency fund.

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

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