Where to Invest Your Emergency Fund: Expert Tips and Options | Spring Money

Life is full of surprises, both delightful and challenging. To navigate the unexpected bumps along the way, having an emergency fund is crucial. It brings financial security and peace of mind, allowing you to weather the storms with confidence. But here's the exciting part: your emergency fund can also be a source of decent returns when invested wisely.

Imagine having the best of both worlds—accessible funds when needed and the potential for growth. In this blog, we'll uncover the secrets to maximizing your emergency fund's potential by exploring the best investment options.

Why Emergency Fund Must be Invested in Liquid Options?

Investing in liquid options means that the fund is easily accessible as and when you need it so that you can use it to cover unexpected expenses. When choosing where to park your emergency fund, make sure you can withdraw the money quickly and without any penalties. Additionally, ensure that the value of the fund doesn't decrease and that it provides good returns.

Where to Invest Your Emergency Funds?

As we already mentioned above that, it's essential to keep in mind that the funds should be readily available when needed. The investments should be low-risk and provide liquidity. Here are some of the best investment options for emergency funds in India:

1. Regular Savings Account

A regular savings account is one of the most uncomplicated spaces where you could park your emergency fund. The return usually varies from 2% to 7% per annum depending on the bank, but the best thing about this investment is its liquidity nature. As we all know that the amount available in this savings account could be used for payments through various modes like cheques, mobile banking, cash withdrawals from ATMs, debit cards, and UPI. Also, most of the payment methods presently don’t even require a physical visit to your respective banks and could even be done before you read this entire sentence.

The only downside of this investment option is that most top-rated banks offer low returns and that too on an annual basis. While there are only fewer banks that offer good interest rates on a half-yearly, or quarterly basis.

Definitely, not all but, you should at least keep 2 to 3 months of your’s expanse or around half of your emergency fund in a regular savings account because it can be accessed hassle-free.

2. Fixed Deposits

By putting your money in fixed deposits (FDs), you can earn a higher interest rate compared to a savings bank account. FDs are also quite liquid, as they can be easily withdrawn from a bank branch on the same working day. If you have an online account, you can even liquidate your FD on bank holidays.

Now banks also offer auto-sweep facilities that you can make use of.

Auto-sweep is a feature that connects your savings account to a fixed-deposit account. It helps you earn more on your extra or unused savings by transferring them into a fixed-deposit account. When the savings account balance exceeds the limit, the extra amount is automatically transferred to the fixed deposit account. This helps you earn a higher interest rate on your idle money than on your savings account.

3. Liquid Mutual Funds

Some experts recommend keeping a portion of your emergency fund in liquid mutual funds, as they are safer than other debt investments and offer higher returns than a savings account. However, keep in mind that it may take 1 to 2 days for online withdrawals to be credited to your bank account. Some mutual funds offer an ATM card facility that allows up to Rs 50,000 per day per scheme withdrawal. Liquid mutual funds invest in debt instruments that have less than 91 days of maturity and earn decent returns without being volatile.

There could be more options, but we have mentioned ones that are easily liquidable, also earn decent returns, and will serve the purpose of most.

Exploring Investment Diversification for Your Emergency Fund

When it comes to investing your emergency funds, the top priority is ensuring easy accessibility while also putting the money to work when needed. There are no strict rules on how to diversify the funds among different investment options. It ultimately depends on your personal financial situation.

Let's consider a scenario where a 30-year-old individual has set aside ₹3 lakhs for their emergency fund. This person would need to assess their own financial picture, taking into account factors such as income, expenses, liabilities, dependents, and ongoing debts. Based on their understanding of these parameters, they might choose to allocate ₹1.5 lakhs to a savings account, keep some cash (₹10,000 to ₹20,000) at home, and equally distribute the remaining amount between liquid mutual funds and a bank fixed deposit.

For someone with a strong understanding of the stock market, they might consider investing a small fraction (around 10% to 20%) in stocks to potentially earn significant returns in a short period. However, it's important to approach stock market investments with caution unless you have solid backups such as minimal debts, no major ongoing expenses, or higher earnings than expenses.

So, the key is to customize your emergency fund investments based on your unique financial circumstances, while prioritizing accessibility and considering potential risks and backup plans.

Conclusion

It is a good idea to have enough money saved to cover your expenses for 3 to 6 months in case something happens, like losing your job or getting sick. Although post-Covid-19 pandemic, some experts suggest saving up to one year's worth of expenses in case of a really big emergency.

It's also important to remember that your emergency fund is for real emergencies only, like if you suddenly can't pay for rent or medical bills. Don't use it for things that are not important or necessary, like buying a new phone or going on a vacation. Make sure you don't spend your emergency fund unless you really need it.

Always remember that an opportunity might or might not knock on your door all of a sudden. But emergencies will strike when you least expect them. So don't wait until it's too late to prepare for the UNEXPECTED!