Kolkata: Nasty surprises have a faculty of popping up when least expected. They can knock on your door any moment — through a job loss, a downturn in business
due to increasing global economic linkages and rising uncertainty, sudden illnesses and even higher education expenses or even a road accident. An emergency fund is to take care of such situations. An emergency fund offers a financial safety net for these trying times. They can help you to meet sudden and prolonged expenditure without incurring debt at all or opting for a very small amount of debt. As the name implies, an emergency fund helps you to steer clear of financial stress and keep peace of mind even in uncertain times. Common people became alive to the need of an emergency fund dramatically when the Covid 19 pandemicstruck depriving millions of families of breadwinners, wrecking jobs, extinguishing businesses and creating financial hell for innumerable people in almost all countries.
What amount is sufficient for emergency fund?
This is a question which has got no straightjackdeet response. The amount of an emergency fund depends on the regular expenses of an individual or a family. But as a ballpark figure, investment advisors quote an amount that can cover expenditure for six months and more as a relatively comfortable cover to tide over a crisis. To calculate an emergency fund, usually the essential expenditures are considered.
Which instruments are appropriate
The key objective of any emergency fund is to provide you with cash flow when financial emergencies crop up. Since emergencies can arise any moment, the fund should be created in a manner so that the money is available in a jiffy. It is clear that the moeny should not be kept in assets which require a lot of time to be converetd to cash. For example, if you buy a plot of land or an apartment and think you can use the money by selling it in an emergency, then you can be caught on the wrong foot. One cannot sell these assets quickly and you might be in for a bigger surprise if yu prepare an emergency fund on these assets.
Cash is the most liquid asset. However, that does nto mean you keep a pile of cash at home. While it can be unsecure, it will also mean the funds will lie idle and lose value steadily due to inflation. It also does not make sense to keep a lot of money in a savigs bank account which will generate a nominal interest of 3.5% or 4%. “Liquid mutual fundscan be a convenient instrument for emergency funds. These offer returns which are usually higher than that of interest in bank FDs. ETFs are also liquid but carry a slightly bigger risk than liquid funds,” say Nilanjan De, director Wishlist Capital and an invetsment strategist for more than 20 years. Banks FDs can be liquidated in a day these days.
(Disclaimer: This article is only meant to provide information. News9 does not recommend buying or selling shares or subscriptions of any IPO, Mutual Funds, precious metals, commodity, REITs, InvITs and any form of alternative investment instruments and crypto assets.)
