Can liquid funds play an important role in emergency financial planning?

Financial planning for emergencies is essential for everyone to manage unforeseen situations. Having adequate funds set aside to cover emergencies gives financial stability and peace of mind. Liquid funds can play an important role in building an emergency fund due to their liquid nature and ability to mitigate impact on capital. This article explores the role of liquid funds in emergency financial planning for investors.

• Table of contents

1. What is an emergency fund?
2. Importance of emergency fund planning
3. Role of liquid funds in building emergency funds

What is an emergency fund?

An emergency fund refers to savings set aside specifically to cover unexpected expenses like medical bills, home or car repairs, unemployment, or any other financial shortfalls. International standards recommend accumulating emergency savings equivalent to at least 3-6 months of living expenses. Emergencies are unpredictable in nature and can occur anytime. Thus, having sufficient emergency funds can help individuals avoid dipping into long-term investments or taking on high-interest debt to meet such needs.

Importance of emergency fund planning

Emergency fund planning is crucial for several reasons:

Unstable employment: India has a large informal economy where jobs are unstable. Cash flow interruptions due to job losses or pay cuts are common. Emergency funds can help one tide over these periods.

Rising healthcare costs: Medical inflation in India is higher than general inflation levels. A single major health issue can burn through savings if one is uninsured. Emergency funds can help manage high medical bills.

Natural calamities: India sees frequent natural disasters like floods, cyclones, and earthquakes which can damage property and disrupt livelihoods. Emergency funds can aid in recovering from such calamities.

Home/vehicle repairs: Unexpected repairs of homes, vehicles, and appliances can be costly. Emergency funds can help you avoid debt for covering such maintenance expenses.

Thus, adequate emergency savings give financial stability to Indians facing frequent income, health, and disaster-related vulnerabilities. A good emergency fund reduces stress during trying times.

Role of liquid funds in building emergency funds

Liquid funds can be an ideal vehicle for parking emergency funds due to their relatively lower risk and high liquidity. They maintain near-constant net asset values (NAVs), making your capital relatively stable and allowing withdrawals at any time.

Liquid funds offer same day insta redemption facilities up to a certain limit allowing emergency fund needs to be met instantly without delay. This addresses the critical requirement of liquidity from emergency savings.

Investors must choose liquid funds based on their time horizon, return expectations and risk tolerance to meet immediate as well as long term emergency funding needs. Regular SIPs in liquid funds can automatically build an emergency corpus over time. Since liquid funds are low-risk and highly liquid, they can be suitable for creating an emergency fund that you can access when needed. By using an SIP calculator online, you can estimate how much your regular SIP contributions in liquid funds will grow over time, helping you determine whether you're on track to accumulate the desired amount for emergencies. This tool allows you to visualize your progress and make adjustments to ensure your emergency corpus is growing steadily.

conclusion

Liquid funds can be an ideal investment avenue for building emergency funds in India due to their risk-adjusted returns, less impact on capital and high liquidity. Along with insurance and alternate credit backups, systematic investment plans in liquid funds can help create a robust emergency financial plan and cushion Indians from unplanned expenditures. This establishes financial resilience, especially for those facing unstable income streams or health contingencies.

Bajaj Finserv Liquid Fund is a liquid fund invested in high quality securities that seeks to provide a level of income consistent with the objectives of preservation of capital, lower risk and high liquidity through investments made primarily in money market and debt securities with maturity of up to 91 days only. However, there is no assurance that the objective of the Scheme will be achieved. For a detailed scheme information, click here.

FAQs:

What is the ideal size of emergency funds that can be maintained through liquid fund investments?

International standards recommend accumulating emergency savings equivalent to at least 3-6 months of living expenses. However, in the Indian context, it is advisable to aim for 6-12 months of essential expenses coverage through liquid funds based on individual circumstances and financial obligations.

How often should one review liquid fund investments in the emergency portfolio?

It is recommended to review the chosen liquid fund investments at least annually or whenever there is a change in the personal financial situation or job profile. Any deterioration in portfolio credit quality should prompt a change in investment.

Can equity mutual funds also be considered for emergency funds?

No, equity mutual funds are not suitable for emergency funds due to volatility in their NAVs. In case of a market downturn, equity holdings may be valued much lower at the time when emergency funds are needed. Fixed income securities like those held in liquid funds should be considered to build emergency funds.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.