The Goal: Building Your Financial Fortitude
First, let's clarify what 'securing a salary' means in this context. It's not about generating a ₹25,000 monthly income from your savings overnight. Instead, it's about building an emergency fund that can cover your essential expenses for several months
if your primary income stops. Financial planners often recommend a corpus that covers three to six months of non-negotiable expenses. For someone with monthly costs around ₹25,000, this means aiming for a fund between ₹75,000 and ₹1,50,000. This fund acts as a crucial buffer, preventing you from dipping into long-term investments or taking on high-interest debt during a crisis. The ten percent savings rule is a disciplined approach to reaching this goal systematically.
Your Tool: Understanding Liquid Funds
The chosen tool for this strategy is the liquid fund. A liquid fund is a type of debt mutual fund that invests in very short-term money market instruments, such as treasury bills and commercial papers, which mature in 91 days or less. This short maturity makes them one of the least risky categories of mutual funds. Their main purpose is to preserve capital while providing higher liquidity and potentially better returns than a standard savings account. Unlike equity funds, they are not designed for aggressive wealth creation but serve as an efficient way to park surplus cash that you might need at short notice.
The 10% Savings Plan in Action
The power of this strategy lies in its simplicity and consistency. The principle is to automatically invest 10% of your take-home salary every month. You can automate this process using a Systematic Investment Plan (SIP). Let’s take a hypothetical example. Suppose your monthly income is ₹40,000. Your 10% monthly investment would be ₹4,000. To build an emergency fund of ₹1,20,000 (covering nearly five months of a ₹25,000 expense lifestyle), it would take you 30 months of saving ₹4,000. However, this calculation doesn't include returns. Historically, liquid funds in India have offered returns in the range of 6-7% annually, although this is not guaranteed and depends on market conditions. Factoring in a conservative return could help you reach your goal even faster.
Why Liquid Funds Outperform Savings Accounts
Many people keep their emergency money in a savings account, which typically offers low interest rates, often between 3% and 4%. With inflation, the real value of money sitting in a savings account can decrease over time. Liquid funds historically provide a potential return that is often higher than savings account interest rates, helping your money work harder for you. Furthermore, they offer high liquidity. While there might be an exit load if you withdraw within the first seven days, redemptions are typically processed within one business day (T+1). Many fund houses also offer an instant redemption facility up to a certain limit, making them highly suitable for emergencies.
How to Get Started in Four Simple Steps
Investing in liquid funds is straightforward. First, you must be KYC (Know Your Customer) compliant, which is a one-time process requiring your PAN and address proof. Second, choose an investment platform. This could be directly through an Asset Management Company (AMC) website or via online brokerage apps that offer direct mutual fund plans. Third, select a suitable liquid fund. When choosing, look for a fund with a consistently good track record, a low expense ratio (the annual fee), and a portfolio of high-quality credit instruments. Fourth, set up a monthly SIP for 10% of your salary. You can start with a small amount, as many funds allow SIPs from as low as ₹100.
A Note on Risks and Taxation
While liquid funds are considered low-risk, they are not entirely risk-free. They are subject to minor interest rate risk and credit risk, which is the risk that an issuer of a debt paper might default. To mitigate this, choose funds that invest in the highest-rated securities. From a tax perspective, under current rules, gains from liquid funds are added to your income and taxed at your applicable income tax slab, similar to the interest from a fixed deposit. There is no indexation benefit. Always be aware of the tax implications on your returns.
