Where to invest your emergency fund corpus
There are many avenues of saving but choosing the right one is essential. An emergency fund helps you plan for unexpected expenses. A financial emergency can come in any form – loss of income, house repair, healthcare expense, etc. Thus, your emergency corpus should be able to take care of your routine cash outflows such as rent, EMI, electricity bill, health insurance/life insurance premiums, school/college fee, grocery bill and so on for a period of at least six months.
Jan 2023
4 mins read
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The thumb rule is to have 6 to 12 months of emergency fund. The advantage of having a financial buffer is that you don’t have to tap in to your investments meant for other financial goals.
The purpose of an emergency corpus is to provide you liquidity. So where should you invest your emergency savings? A bank savings account provides the highest level of liquidity. However, the problem with keeping money in a savings account is that you could tap into it unknowingly for discretionary expenses.
While it is good to have some money in a savings account for easy access, one should also look at investing in other avenues which could yield a little higher return than your savings account.
Mutual funds offer you a wide range of categories to meet different goals – short term to long term. For a goal like building your emergency corpus, we have shortlisted a few categories of funds which could be ideal to invest your emergency corpus.
Overnight Funds
These funds come with the lowest risk within the debt fund category. This is because they invest in securities such as G Secs, T bills, Tri-Party Repo (TREPS), Repo Order Matching system (CROMS) or AAA PSUs and PFI Money Market Instruments which mature in 1 day. The credit risk and interest rate risk in these funds is low. Overnight funds can be also used to park your surplus cash.
Liquid Funds
Liquid Funds invest in debt and money market securities with maturity of up to 91 days. They aim to provide steady returns along with high liquidity by investing in a portfolio of short -term, high quality money market and debt instruments. They carry Low to Moderate risk.
Ultra Short Duration Funds
Ultra Short Duration Funds aim to provide liquidity and seek to generate returns by investing in a mix of short term debt and money market instruments. These funds aim to maintain Macaulay Duration of between 3-6 months. They are ideal to park your surplus money for a period of 2-4 months. These fund carry Low to Moderate risk.
Low Duration Funds
These funds invest in Debt & Money Market instruments such that the Macaulay duration of the portfolios is between 6 months-12 months. Low Duration Funds can be used to park emergency corpus and surplus cash. They carry Low to Moderate Risk.
Arbitrage Funds
Arbitrage Funds invest in cash and derivative markets simultaneously. The advantage of Arbitrage Funds is that they are less impacted from market volatility due to hedged positions.
As compared to Debt Funds, where short term capital gains are taxed at your slab rate and Long Term Capital Gains (holding period of 3 years) are taxed at 20% with indexation benefit, Arbitrage Funds provide a favorable taxation (15% short term capital gains and 10% long term capital gains tax on gains exceeding Rs 1 lakh).
The holding period for availing LTCG tax in Arbitrage Funds is one year as opposed to three years in Debt Funds. You can consider investing some portion of your emergency corpus in Arbitrage Funds if your investment horizon is more than three months. Arbitrage Funds carry Low Risk.
To sum up, an emergency fund gives you the peace of mind to cover for life’s unexpected surprises. Plan it well by investing in the right asset class which provides safety, liquidity and carries low risk.
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All the Mutual Fund investors have to go through a one-time KYC (Know Your Customers) process. Investor should deal only with the Registered Mutual Funds (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit https://www.pgimindiamf.com/ieid.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
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