‘Create emergency fund to overcome a crisis’

Covid-19 has upended the lives of tens of millions of people across the country. From pay cuts and job losses to unexpected medical bills, the pandemic has wiped off the bank accounts of countless individuals and wreaked havoc on their long-term savings and investment plans.

According to financial advisors and tax experts, one should never break the retirement funds or savings towards property or education, instead create an emergency or contingency fund to wade through unexpected financial crisis without hurting the long-term financial goals.

“The Covid-19 crisis has led to job loss, income loss, and unexpected medical expenses and business losses to many people. The current crisis is the best example to highlight the need for creating an emergency fund,” said Balaji Domerapati, Regional Head, Kerala, ICICI Prudential Mutual Fund.

He was making a presentation at the Smart Investor webinar on ‘Overcoming Financial Challenges Through Investment’, organised by ICICI Prudential Mutual Fund, in association with BusinessLine on Saturday.

The webinar was moderated by Parvatha Vardhini C, Head, Research Bureau, BusinessLine.

“Emergency funds can be saved in the form of daily, weekly or monthly basis, or whenever we get a corpus or additional income, which can last for up to six months,” he added.

He also added that a mindset of growth and prosperity and habit of savings is essential to meet financial challenges through investment, and that one should start saving early in mutual funds for the benefit of compounding.

Balwant Jain, investment and tax expert, said: “Traditionally, we have a belief that one should have an emergency savings equal to six monthly outgo, which should include household, EMIs and SIPs. But given the uncertainty of the current pandemic, we advise that if people can, then they should maintain an emergency funding that could last up to one year.”

The Chartered Accountant and Certified Financial Planner also added that investors could look at Liquid Mutual Funds and Fixed Deposits with banks for maintaining emergency funding. “Bank FDs are not as liquid as mutual funds, and you also cannot withdraw partially from the FDs. Besides, interest from FD is taxed as your normal income, whereas if one remains invested for more than three years in liquid funds, then it is treated as long-term; so, the investor can get the benefit of indexation and pay 20 per cent tax on it,” Jain added.

Big-ticket expenses

He also advised that when the financial conditions are back to normal, people should first replenish their emergency funding and SIPs redeemed during the crisis before making any big-ticket expenses.

On choosing the right avenue for long-term savings for retirement, Jain said that for any financial goal that is more than 10 years, one can look at investing in diversified mutual funds across large, mid- and small-cap categories, which can even out the volatility in the long run.

Jain also added that many people go for annuity products to invest their corpus post-retirement.

“Instead, I would suggest three products: Senior Citizens Savings Scheme, which offers 7.4 per cent for five years; Pradhan Mantri Vaya Vandana Yojana, an annuity scheme, which gives 7.4 per cent return for eight years; and RBI Floating Rate Savings Bonds, which currently offers 7.15 per cent.”

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