Emergency Fund : Short/Ulrtra Short Term Funds or Liquid Funds

POSTED BY Samir ON August 25, 2012 10:05 am COMMENTS (6)

Experts,

I would like to create 3 lac Rs of emergency fund … 

I am confused on how to approach it. I have account in ICICI Bank (+ICICIDirect Trading) and IDBI bank. 

On this forum, I read about Short Term/Ultra Short term funds and liquid funds to accomlish this. 

Question –

1) How should I go about on allocating this (% in Sweep FD, Debt MF and Liquid Fund)

2) Why anybody would choose Liquid or Money Market fund when there is 27% DDT compared to 13% on Short Term/Ultra Short Term funds? 

3) What is benefit of Long Term Debt funds over Short Term Debt Funds.. I mean why anybody would like to lock money for 1 year when same retruns can be available in Short Term Debt Funds? Is there different level of risk attached to them

 

Warm Regards

Samir

6 replies on this article “Emergency Fund : Short/Ulrtra Short Term Funds or Liquid Funds”

  1. Samir says:

    Dear Ashal..
    Sorry for dragging this along…

    I am in 30% tax slab… I think I will go for Ultra Short Term funds…

    For Short/Long Term funds… I guess I want to know what benefit Long Term funds brings over Short Term funds… when the returns are kind of same… I mean why would anybody would like to lock money for long term… when he can get same kind of returns in short term funds… Is it risk profile of these funds or something else that I am missing on..???

    Warm Regards
    Samir Gorey

    1. Dear Samir, the ST or LT debt funds are classified on the basis of maturity of the underlying assets (read debt papers). Now if you are asking based upon the current data or for past 3-6-9 months data, the returns are same due to hardening in interest rates. Down the line as & when the interest rates ‘ll start declining, the LT funds ‘ll provide better return.

      Thanks

      Ashal

    2. Dear Samir, Please do not feel sorry for dragging along. This forum belongs to all of you. If you people are not questioning, what’s the role of this forum then?

      Regarding your basic query for Ultra Short Term & Short Term & Long Term Debt funds. Please opt the fund based upon your own investment period. Say you want to invest for 1-2 month period, ultra short term funds ‘ll do the job. From 3 to 11 months, Short Term funds ‘ll do. For anything above 1Y or say more than 15 months, Long Term Debt funds ‘ll do the job for you.

      So basically it’s your requirement to select, which fund to invest in.

      Thanks

      Ashal

  2. Samir says:

    Ashal… obviously for emergency fund aim should be safety and liquidity….

    Could you please also shed some light on Question 2 and 3… Why anybody would invest in money market fund and Long Term Debt Fund…??

    1. Dear Samir, One may chose Growth options also in Liquid or Monet Market funds if the investor is in 10 or 20% tax slab. In this case the STCG tax ‘ll be lower than the DDT rate of 27%.

      Short term funds are meant for that term where as long term ones meant for long term, so both of these should not be compared with each other.

      Thanks

      Ashal

  3. Dear Samir, as the money in question is for emergency purpose, should the primary Aim be safety & liquidity or be it return?

    In general, I w’d like a 50-50 split between Sweeping FDs & Liquid/Liquid+/Ultra Short term debt funds.

    Thanks

    Ashal

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