But you said that emergency fund is not meant for investments. It is that liquid money which should be easily accessible and to be used only in case of emergency, asked Sunil one of my friend whom I had advised to save for emergency funding first before starting off with long term investments.
Yes this is true that Emergency fund is meant only for emergencies and it is one of the risk management tools which should always be among the first steps in financial planning. But with the advent of new products and also improvisation of some old ones and technological advancements, there’s no harm in parking your emergency fund or part of it in the products which serves the requirement of liquidity and helps earns some income also.
Below are few investment options which can be used to park emergency fund to get better returns than Bank savings account without compromising on liquidity part.
Emergency fund Investment options
1. Sweep in bank Fixed deposits:
Keeping emergency fund only in savings account may provide you with enough liquidity but here you will have to compromise with the returns. Generally it is advised to keep minimum of 3-6 months of household expenses as emergency fund, which may be increased depending on the economic, personal and Job scenario.
Now in many families this amount range above Rs 1 lakh and in some it goes as high as 5-6 lakh. With Savings bank rate @4% and fixed deposits @8%, money in savings account gives around 50% less returns than bank fixed deposits
To fill up this gap, you should ask your bank if they offer sweep in fixed deposits. Sweep in deposits are fixed deposits which are linked to savings bank. In this investment option any amount over and above a specific limit (depending on bank) goes into a fixed deposit. And when you withdraw out of it, last FD made got broken first so you don’t lose more on interest side.
This investment option will let you keep money in savings bank a/c without losing on FD interest rates. It is a saving bank account only with linked fixed deposits.
2. Bank Fixed deposits with Overdraft account:
Sweep in deposits are though I believe offered by many banks but not all banks. So if yours is the one which does not offer this facility, then don’t lose heart as there’s another Investment options too.
You may use Loan against fixed deposit through overdraft account.
In this facility bank will open one overdraft account for 75-80% of the fixed deposit amount. You will be charged with 1.5-2% higher than fixed deposit rate, but only if you use this amount and for the tenure you use it. This option has 2 benefits – one it maintains the liquidity which is required for emergency needs and other is that you need not to break the FD in case of your short term needs.
As fixed deposit rates comes in slabs, so if you invest in 1 year FD and breaks the FD before completion of tenure then you will be paid with the rate of actual invested tenure. Say for example you make FD of 100000 for 1 year @8%, and FD rate for 6 months is 6%. Now if you break your FD of 1 year in 6 months, then you will be paid 6% and not 8% and that too for half year i.e. the actual invested tenure.
Now using this overdraft option, you can stay put in the FD till the completion of tenure and use the overdraft funds for your short term need
Do note that this facility is beneficial only if you replenish the overdraft account as soon as possible from your next salary or any other source. But if you see that replenishment is not possible then rather than using Overdraft account, just break the fixed deposit. Also to make the best use of this facility you should be net savvy so you can transfer money from OD a/c and back. Offline process may be too cumbersome.
I personally use overdraft facility to maintain business emergency funding. It’s been 2 years and I’ve faced emergency only once for which I had ample liquidity through OD a/c which i replenished in next 2 months.
So why to keep money in saving or current account?
3. Liquid Mutual funds
Liquid mutual funds are also one of the good investment options to park emergency fund. But operationally it may prove to be a bit of troublesome, as it requires 24 working hours’ time to redeem the funds lying in investment account. This may sometimes be a very long time especially when we talk of emergencies.
To answer this trouble, Reliance Mutual fund has come up with an innovation of “Any time Money card” which is a debit card issued along with ( If applied for) Reliance Mutual fund investments. With this card investor can withdraw up to 50% of the balance or Rs 50000 whichever is less, lying in the investment scheme. Investor may also swipe the card at any point of sales terminal for shopping or fuel purchase or any payment which is to be made through debit card with maximum limit of Rs 1lakh or 50% of investment amount whichever is less.
So investing in liquid funds with any time card in hand can be one of the good options to park emergency fund. But do keep in mind that this will give you partial liquidity and you may need to wait for some more time to get the 100% withdrawal amount.
I use this facility at personal level too. For family expenses as per the budget,i transfer a specific amount every month into my Reliance liquid fund account and operate through debit card as and when required. I also use this to park the part of personal emergency fund.
Conclusion:
Emergency fund is meant for emergencies and should be readily available with you. You cannot compromise on liquidity and thus it may not be wise to invest the emergency funding in any long term instrument just to get more returns.
But still if there can be some arrangements or products which can be used which helps in maintaining the liquidity along with has potential to generate better returns, then one should definitely try those.
( also read : DHFL Wealth 2 health – Corporate fixed deposit with health card)
From the investment options suggested above in if one use “sweep in” Fds then the whole of emergency fund can be parked there, but if one wants to go with any of the other 2 options the one should not invest the complete emergency fund but a part of it …say 60% of total.
Do you think there could be other investment options too where one can park his emergency fund? Do share your views
Manikaran Singal is the founder and Chief financial planner at Good Moneying Financial Solutions. He is a CERTIFIED FINANCIAL PLANNER CM and SEBI registered Investment adviser (Regd no. INA 100001620). He’s having 20+ years of experience in financial services space.
is there an equity MF which can provide instant redemption option? I want to create an emergency fund, but with no taxation and quick redemption, something like an MF account with cheque book..
Fundamentally, equity mutual funds are meant for long term goals, not for near term, immediate requirements. As far as withdrawal is concerned, you may withdraw anytime from all mutual funds except the ones which come with lock in. For example ELSS, Retirement Savings Fund etc. But the withdrawal may be subjected to an exit load, if done within a specific period of time. Also, the credit comes in T+3 days. So, it doesn’t make sense to park your emergency fund in these funds.
For creating emergency fund, the idle instrument would be the liquid/ultra-short term category of debt mutual funds. They generate decent enough returns, in line with inflation and money can be withdrawn anytime, but subject to some exit load rules ( with in 7 days). The credit would be received on the next working day. Some liquid funds come with debit cards as well.