Emergency Fund: The Right Way To Build It

Ramesh, a seasoned investor, shares his story where ignoring an important block of financial puzzle resulted in a harsh financial trap. It was 2007 when Ramesh just entered the market, it was a good time, he recalls, adding that he invested all his wealth in the stock market.

Since Ramesh had a well-paying job and he did not need extra money, investing all his wealth in a single asset class appeared to be a right decision. His salary was enough to pay for the home EMIs, car loans and household expenditure. Ramesh thought ‘going all in’ for the equity will build enormous wealth in the long run.

However, something was cooking in the other part of the world, where the banks were sanctioning enormous loans to homebuyers in the U.S. The loans were so risky that eventually, a major investment bank called Lehman Brothers went bankrupt, leading to a severe recession in 2008.

Ramesh who was sitting in India also felt the tremors of this financial earthquake. His investments crashed massively, the portfolio lost 70 to 80% of its value, and the high paying MNC company could no longer employ him. Losing his job while having financial responsibilities hit him like a nightmare. Things changed quickly, paying for household expenditure and home EMI felt like a burden with no way out.

Such financial emergencies can knock on the door anytime; however, you don’t need a global crisis to learn a basic financial rule, the ‘importance of emergency fund.’

Emergency fund is a corpus which takes care of your short-term financial needs when the unexpected financial expenses knock on your door. Experts suggest that the emergency fund should ideally have 6 to 12 months of your household expenses. However, there are a few important things which need to be kept in mind while building or having the emergency fund.

Minting Emergency Fund:

• Not An Investment - One of the most crucial things to remember and strictly follow is that an emergency fund is not your investment fund, and it is certainly different from your high returns’ investments. It is a protection net i.e. Savings fund which must be prioritised before you start investing.
• Opportunity Fund - It is also not an opportunity fund which you could use when you find good opportunities to invest. Emergency fund is a sacred fund which should not be allowed to be redeemed until you meet with the emergency, and we wish that you better not! Keep your temptation under control.
• Easy To Withdraw - The emergency fund should be easily accessible. It should not be locked in long-term fixed deposits, stocks, bonds or anything where the value can fluctuate or is stuck with a lock-in. Please note emergencies in life do not come with a timer, nobody knows the true nature of what is waiting for you.
• Relying On Credit Cards - Well, well, well, do not even think of it. Various immediate expenses can be paid through your credit card, but ultimately it must be paid from your end, or your problems will be two-folded. Debt with high interest on your head.
• Returns Do Not Matter - It is highly advised that emergency funds should be kept in an instrument which is easily accessible immediately or within a day. Considering the interest on the savings account, inflation and uncertainty about the use case, the emergency fund should be parked in the highly liquid mutual funds. However, do not expect extravagant returns on that.

“Not every mutual fund is for the long-term. Short-term funds can be a great way to park your idle funds or build an emergency corpus. If you want to create a buffer for the uncertainty without disturbing your long-term investments, these funds let you stay flexible while earning better returns than a savings account,” says Ajay Patwari, Co-founder, MINTIT.

MINTIT, India’s only dedicated Mutual Fund Platform, caters to your personalised goals and accompanies you to achieve your financial milestones. To systematically build your emergency corpus while parking your money in the right funds, MINTIT is there to help you.

Also, depending on your profile it precisely suggests tailored investing plans to achieve your goals. Whether it is to create an emergency fund or to create wealth, download MINTIT now. Happy Investing!