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The Importance of an Emergency Fund in COVID19 Era-Part 2

Mayur Pirgal & Kanchan Dwivedi

Have you been blowing away all your earnings every month, believing that you just cannot save anything?

Well, in that case, it will help you to know about Emergency Fund, the sum of money that you save, to take you through rough times.

Given that it is amply clear today, after COVID19, that people may face unexpected situations like a job loss, salary loss, or salary cut, that might affect their health, business and life, we at LoanGini wanted to talk about always having an Emergency Fund that you can dip into in times like this.

Last week, we covered the topics including What is an Emergency Fund?, Why should you save for an Emergency Fund?, How much money should you allocate for an Emergency Fund ? in Part 1 of our Two- Part article, The Importance of an Emergency Fund in COVID19 Era-Part 1

In Part 2 of Emergency Fund Series, we share about How to Build an Emergency Fund? Tips for Investing in a Emergency Fund & Redemption of an Emergency Fund?

Cover Credit-

1. Building an Emergency Fund

In building an Emergency Fund, the suggestion for you is to follow the steps shared below:

  • Saving every Month- Once you have identified the amount that you would like to have in the Emergency Fund. Then, work towards putting aside a regular sum every month, from your salary. It is advisable to put aside 5-10% of your income towards the Emergency Fund. The idea is to build the fund gradually over time as putting aside a big sum of money may pinch. For e.g, you have decided to save Rs. 1,80,000/- as an Emergency Fund, since your expenses for the month on an average are Rs. 30,000/- ( this expense should be including the EMIs/ loan instalment every month). In this case, it would not be possible to put this big amount aside immediately, and one would have to set aside a small amount every month (similar to an EMI).

  • Open a Separate Account for the Emergency Fund. This would also ensure that you don't withdraw money from this account, except when it is an emergency.

  • Set up Auto Debit- Set up an auto-debit of a comfortable sum from your salary account that is directed towards the Emergency Fund each month.

  • Additional Sums of Money- Any Bonuses received during the year, Refunds received from taxes annually or Salary Arrears can be routed to this fund.

  • Make Daily Savings a part of your Daily Routine through a Piggy Bank. That 100 Rs. note lying around at home on the counter, or the change after breaking a Rs. 500/- note at the Grocers can go into the Piggy Bank as well. Contribute these small sums to the emergency fund once a month or after a neat sum has accumulated.

2. Tips for Investing in an Emergency Fund

Just planning for and saving for an emergency fund is not enough. The fund needs to grow. The following are some pointers that will help in investing your funds efficiently:-

  • Liquidity is an important factor when accumulating funds for emergencies. You would want to invest your funds in a liquid instrument, from where you can withdraw easily when you need it . Thus, invest in Liquid Mutual Funds or short term Recurring Deposits, having immediate accessibility to the money. Investments like Long-Term Deposits, Provident Fund and National Saving Certificate have penalty imposed, if redeemed before maturity, & have an upper limit on withdrawals and thus, are not liquid.

  • Protection of investment by avoiding investments in risky asset classes like equity shares . Even if the expected returns are a bit lower, the funds should be invested in low risk environments to preserve the amount.

  • Allocation of Emergency Fund- It is suggested to keep some of the Emergency Fund as Cash, some invested in Bank Deposits, and the rest invested in Liquid Mutual Funds or Recurring Deposits. The suggested distribution is 15:15:70 in terms of cash, bank deposits and investments. A 15% of cash serves the purpose of instant source of money. Keeping extra cash has drawbacks concerning the safety as well as loss of value due to inflation. The other 15% kept as bank deposits would also serve as an instant source of money while also earning a small interest over time. The remaining 70% can be invested in short-term Deposits or Liquid Mutual Funds where redemption is possible as well as it offers betters returns than a Bank Deposit. Liquid Mutual Funds are Debt funds that invest in Fixed Income Securities with less than 90 days maturity & offer fixed returns. They have no lock-in period. The reason behind such an investment is higher returns than Bank Deposits while providing a satisfactory liquidity. The initial 30% of funds can be used until the later 70% of sum is made available in case of the emergencies.

  • Review Allocation- Like every investment option, the Emergency Fund allocation should be reviewed periodically. If your family size grows, and maybe you go from being single to married or from a couple to having a kid , a proportionate increase should be made in the Emergency Fund, too.

3. Redemption of an Emergency Fund

Some of the Liquid Mutual Funds allow a instant redemption of Rs. 50,000/- withdrawal or upto 90 %, however this is possible only in case of Growth Mutual Funds & online. The redemption of a Liquid Mutual Fund can be done in 24 hours, without any entry or exit load.

The Emergency Funds, thus, can be a boon in times of adversity.

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