For Indian household emergency fund is not a new concept. But the same has lost its importance in the recent years due to availability of of credit card and easy loan facility. People do not understand that these loans and credit cards come with interests. They help you meet your urgent financial need but the individual has to pay heavy interest on the same. The interest ranges from 18-24% approximately. This interest initially looks less but over a long period of time hurts your future income.
Emergency fund is the liquid asset available in inadvertent circumstances. Hard cash is the most liquid asset. Thus emergency fund can be kept in the form of cash. Cash at bank is also as liquid as cash as it can been withdrawn anytime using ATM/debit card. Liquid mutual fund is also a vey good option as emergency fund. Unlike other Mutual funds, liquid funds can ben redeemed within 3 hours and can been withdrawn easily. On the other hand Liquid funds provide a return of approximately 7-8% annually.
Emergency fund should ideally be equal to 3 months household expenses. For Example, in case an individual has a monthly expense of Rs. 50,000 he should have an emergency fund of at least Rs. 1,50,000. To be more cautious an individual can also keep an emergency fund equal to 3 months income. For example, an individual earning Rs. 12,00,000 annual may keep Rs. 3,00,000 as an emergency fund. This emergency fund also provides a financial cushion in case of loss of income. In case an individual loses his job he has his household expenses covered for at least 3 months.
Liquid Mutual Funds are better option as compared to Cash or bank balance. In case of Cash the individual does not receive any returns, in case of money in the bank the returns are as low as 3%, whereas the returns provided by liquid fund is approximately 7%. Liquid fund has multiple benefits, it can be used as an emergency fund and on the other hand it can be used as short term investment.
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