What is Emergency Fund?
The purpose of setting up of Financial Emergency fund is to fight against Financial uncertainty in casual living such as Financial emergency due to sudden accident/illness of loved one, Job loss or sudden business problems etc and moreover emergency fund is kept as liquid finance/cash or cash equivalent. Financial Emergencies are a major hurdle in Financial Planning. Financial emergencies can be of any kind and could ruin one’s financial situation. So while preparing financial plan of one,setting up of Emergency Fund is given priority. Importance of setting up of emergency fund can be felt as life is uncertain & you may require a much quantum of finance to cope up with this uncertainty, sometimes savings of years too are remain short to fund it. So in this way it becomes necessary to create a separate fund having objective to tackle uncertainties in life.
What should be the quantum of Emergency Fund?
It is a very debatable concept that what should be the quantum of emergency fund, as we have already stated that it is much difficult to predict future and thus future’s financial emergencies. To tackle some uncertainties like health issues there are health insurance but as cost of health emergencies are rising, health insurance can too fall short to fund. Ideally there should be a emergency fund equivalent to 6-9 times of Monthly consumption but still as we have already stated one may kept a high or low quantum according to regular cash flows of individual.
What are the Investment options?
Emergency fund investment should be in totally cash or cash equivalents such as saving bank account, liquid funds, short term funds etc. Investments options should be free from market risk or other redemption clauses such as lock in of investment. moreover it is better to make a portfolio so that money goes not lie idle.
Disclaimer:- Mutual Fund investments are subject to market risk, please read all the documents carefully before investing.