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Can you please suggest how I can build an emergency fund? Also, where do I keep such a fund (will it be fixed deposits or liquid mutual funds)?

Please also elaborate on the nature of emergency funds.

—Karan H. Jain

 

Emergency or contingency fund is an integral part of your overall finance. The purpose of the emergency fund is to provide a strong cushion for your finance in case of a crisis.

It helps you to take care of any financial emergency without disrupting your investments which are predominantly earmarked for your long-term needs.

Every family must have an emergency fund in place depending on the monthly mandatory expenses.

Such a fund is extremely useful in case of any health-related contingencies despite having insurance in place.

The way to build your emergency fund is to evaluate your monthly mandatory expenses like household expenses, children’s education fees, equated monthly instalments (EMIs), and insurance premium payments.

Usually, six to nine months of these mandatory expenses can be kept in a large and established bank’s fixed deposit or liquid or ultra-short duration funds.

The number of months of expenses to be saved depends on how secure your job or business is.

However, a provision for a minimum of six months’ expenses should be always in place. Once you have worked out the total emergency fund required, you can start building it by straightaway parking the money from the bank account if you have it there or you can start a separate fixed amount every month in your bank account or park it in liquid funds until the balance of that account or folio reaches your planned emergency fund.

Always prioritize the safety of your emergency funds over returns by parking them in a large and established bank’s fixed deposit and liquid or ultra-short duration fund with a high-quality portfolio.

Harshad Chetanwala is co-founder at MyWealthGrowth.com.

 

 

 

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