The starting point of all financial planning activities is readying a corpus that caters to any contingencies on an urgent basis. Job losses, wage cuts, unexpected hospital admissions and the like can be a big drain on your savings. Having an emergency fund so that you don’t have to touch your investments targeted at financial goals in case of emergencies is critical.
There’s the thumb rule on how much you should save – 6-12 months of all expenses or higher. School and college fees of children are to be added, too, for the calculation. Some also add investment commitments to the corpus to be accumulated.
This article, however, is not about deciding your emergency corpus. It is about where you should be parking this money, so that it is available on tap readily.
A few key aspects you should keep in mind while choosing the right avenues are that you are not seeking to maximise returns, nor are you seeking to manage asset allocation via these investments.
You do not even have to beat inflation with your contingency funds. The idea must be, at best, to get better than savings account interest offered by large public and private banks — 3-3.5 per cent levels.
Safety, liquidity and simplicity are the watch words for investors. Here are some options to consider.
Liquid mutual funds
These schemes invest in the safest of instruments that include short-term government securities, treasury bills, highly rated securities of private companies with low tenor and so on. Liquid mutual funds are fairly safe as they have no credit risk and carry minimal interest rate risk. Over the years, the best liquid funds have managed 6-6.5 per cent returns, going up to 7 per cent at times.
Though beating inflation is not a requirement, returns from these funds generally tend to keep pace with inflation.
But the key advantage from an emergency withdrawal standpoint is the instant redemption facility offered by many fund houses.
Aditya Birla Sun Life, ICICI Prudential, Axis and Nippon India, among others, offer this option. You can withdraw 50 per cent of your accumulated corpus or ₹50,000, whichever is lower immediately. The rest would be made available within one business day. So, if you choose three liquid funds, for example, you can instantly redeem up to ₹1.5 lakh quickly.
Aditya Birla Sun Life Liquid, ICICI Prudential Liquid and Mirae Asset Cash Management are good choices to consider.
You can keep 25-30 per cent of your contingency kitty in liquid funds.
Fixed deposits with sweep-in
Most large public and private sector banks give the option of moving a portion of your savings account balance. Usually, banks set a threshold of ₹10,000 or ₹25,000. If your savings account balance is more than this, a sweep-in facility is offered where the excess balance beyond the threshold is moved to create a fixed deposit that offers higher interest. But the deposit under the sweep-in facility and the savings bank account balances are available on tap at any point in time.
Thus, you get a liquid fixed deposit that can be used during contingencies. For high income earners and healthy savers, too, this can be a good source of parking their emergency corpus.
You can have two such accounts in different banks — your salary and investment accounts perhaps.
ICICI Bank, HDFC Bank, Axis Bank, IndusInd Bank, SBI and Kotak Mahindra Bank, among many others, offer the sweep-in facility.
You can keep up to 40 per cent of your exigency funds in such bank accounts.
Savings accounts with high interest rates
There are some private banks that offer higher interest rates on savings accounts. The rates can go as high as 7-7.5 per cent.
But the catch here, obviously, is that the balance requirements are heavy in such savings accounts.
For higher interest rates, you may be required to maintain a balance of ₹5 lakh, ₹10 lakh or more.
However, given that your contingency funds are likely to be sizeable, it may be worthwhile considering such bank accounts.
IDFC First Bank, IndusInd Bank, RBL Bank, Ujjivan Small Finance Bank and Bandhan Bank offer these interest rates. In most cases, the interest is calculated slab-wise. So, the first ₹1 lakh will get lower interest of 3-4 per cent, then next ₹1-5 lakh may get higher rates and so on.
You can restrict such balances in one or two banks and park the remaining 30-35 per cent amount in such accounts.