Keep your emergency fund in a liquid or ultra-short term fund with no exit loads
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I had wanted to use my last year’s Diwali bonus towards tax planning. But the way events took shape, I had to put all my emergency money into the bank. Now, even after all the investments, I am sitting with a large amount in my savings account. Ideally, I want to take most of it out and replenish my emergency fund, as I have young children and old parents to look after. Hopefully, I will be able to do that in a few months. Please advise what I should do with the money till then. I can spare about Rs2 lakh now, but would like to withdraw most of it as soon as possible.
If I understand your question correctly, I think you are keeping your emergency fund in cash. And you deposited the money in the bank after Diwali to handle the demonetization situation. At this time, you are looking to see where to keep this money or invest it until you can withdraw it into cash and keep it as emergency fund as you did earlier. And your question is to seek proper investment avenue for this temporary duration of a few months.
If this is the case, I would first question the need for maintaining an emergency fund in the form of cash where it makes no returns at all and also poses a security risk. If your money is available at a moment’s notice from an ATM or at a day’s notice from a liquid fund, then what would be the need to hold currency? Even if you are averse to using credit cards for occasional quick transactions, you can use your debit card or any other card that provides for instant money access. So, I would first advice you to ensure that your emergency funds are maintained in an investment vehicle—either in a bank account or a mutual fund investment—making a nominal return.
To answer your question directly, it is clear that you cannot take any risk with this money in terms of exposing it to market dynamics. The only safe place for it then would be a liquid fund or, at best, an ultra-short term fund. Please ensure that the fund you invest in carries no exit load. Liquid funds, such as the one from Reliance Mutual Fund, also provide an ATM card access, which lets you use it in ATM machines for quick withdrawal of cash.
I earn Rs25 lakh a year and prefer to invest in the equity market directly. Equity investing being an intensive activity, I want to take it easy for a few years and want to put my surplus money into mutual funds. However, many people are telling me that I should invest in debt mutual funds instead of equity mutual funds. I am a believer in equity. Does it work differently in mutual funds?
Equity investing is most profitable if done with a long-term investment period in mind. When it comes to this principle, any form of equity investing—whether directly in stocks or indirectly through mutual funds—works the same way. The advantages with mutual funds are you get the benefit of diversification (ability to lower your risk by investing in many stocks than you can as an individual investor) and the investment management acumen of an expert fund manager. For these advantages you will pay a fund management expense instead of the brokerage expense that you would incur when you do direct equity investing.
So, if you are starting investing now, as long as the money you are investing today is for the long term (and by long-term I mean at least 5 years), you should definitely choose to invest in equity mutual funds. After a few years, when you want to invest in direct equities, I would recommend that you do so with a small amount of money (about 10-20% of the amount you have invested in mutual funds at that time) and go cautiously from there. The time and energy required for direct equity investing will be no less at that time, and the amount of attention you can spare for it would likely be diminished with passing years.
So, it would always be prudent to invest a relatively small sum in direct equities (if that) and leave the real investment portfolio management to the professionals in the form of mutual fund managers.
Srikanth Meenakshi is co-founder and COO, FundsIndia.com.
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