What Are the Safe and Liquid Options for an Emergency Fund?

source: forbes

An emergency fund is necessary for any financial plan. It cushions against unanticipated expenses or loss of income, such as a job loss or medical emergency. However, determining where to invest this capital can be difficult. The fund must be both safe and quick to access in case of an emergency.

That is where safe and liquid options to invest for emergency funds come into play. So read on to find out the best places to park your money and the pros and cons of each.

Safe and liquid funds are investments that prioritise capital protection and ease of access. These funds strive to give you stability and minimal risk while allowing you to withdraw the money promptly whenever necessary.

Liquid funds are debt mutual funds investing in short-term money market securities that have a maturity period of up to 90 days. These funds are invested in various securities, such as Term Deposits, certificates of Deposits (CDs), etc. Liquid funds can be your best option for an emergency fund as it is simple to withdraw an emergency fund from a liquid fund investment.

An emergency fund is essential to personal finance, as it provides a financial cushion during unexpected events such as a job loss, medical emergency, or car repair. It is recommended to keep 3-6 months of living expenses in your emergency fund.

Here are some best liquid funds for an emergency fund in India, along with their benefits and drawbacks:

1. Liquid Mutual funds

Liquid funds are mutual funds that invest in short-term, low-risk securities and are suitable for emergency funds. They offer high liquidity, low volatility, and better returns than traditional savings accounts. However, investors should consider their risk tolerance, investment objectives, and financial needs before investing in liquid funds.

So, if you are a conservative investor who prioritises safety over higher returns, you can prefer to stick to traditional savings accounts or fixed deposits for emergency funds. But if you are willing to create a diverse investment portfolio for your emergency fund, liquid mutual funds can be ideal for you.

2. Savings Account

High-yield savings accounts can be an excellent alternative for a liquid option for your emergency fund in India. Compared to standard savings accounts, you can get higher interest rates while still having simple access to your funds.

Moreover, savings accounts are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). Therefore, the government protects your deposits up to a certain amount.

3. Fixed Deposits

Fixed deposits (FDs) are a popular investment vehicle in India. They provide fixed interest rates for specified periods, often 1 to 10 years. FDs are also regarded as secure and low-risk investments. They may, however, impose a penalty for early withdrawal, which may restrict liquidity.

But if you have a low-risk appetite, FDs can be a good option as they offer capital protection, unlike mutual funds. For those who can afford to lock their money for a fixed period, fixed deposits can offer higher returns than savings accounts while still providing safety.

4. Short-Term Debt Funds

Short-term debt funds could be an excellent liquid investment for an emergency fund. They provide better yields than savings accounts and are less risky. They mature in 1-3 years, making them immediately available when required.

However, they are exposed to market risks and may have fluctuating returns. Before making any investment decisions, it is always advisable to contact a financial counsellor.

5. Ultra Short-Term Debt Funds

Ultra Short-term debt funds invest in debt securities with a maturity period of up to 1 year. They offer higher returns than savings accounts and are relatively low-risk. Therefore, if you are risk-averse and have a 3-to-6-month investment horizon, consider investing in ultra-short-term funds.

For those who want higher returns than savings accounts but do not want to take on too much risk, short-term or ultra-short-term debt funds can be considered. They provide moderate returns while still maintaining safety and liquidity.

6. Gold ETFs

Many investors in India invest in Gold ETFs as an emergency fund due to their capability to beat inflation. These are highly liquid investment options that may help diversify a portfolio.

However, they may not be the greatest choice for an emergency fund because they are vulnerable to market risks and can have fluctuating returns. However, if you aim to create a long-term emergency fund, it can yield high returns.

An emergency fund is essential for financial security and peace of mind. Choosing safety and liquidity above high profits is critical when determining where to put your emergency cash in India. Savings accounts, fixed deposits, liquid funds, and ultra-short-term debt funds are all good safe and liquid options to invest for emergency funds.

Finally, the selection will be determined by your own financial objectives and risk tolerance. You can have its security and readily accessible when you need it most by carefully analysing your alternatives and making smart selections.