Emergency Fund – What to do with it?

POSTED BY Ashish Garg ON April 11, 2013 1:52 pm COMMENTS (15)

Hi,

As discussed in various questions here, I am on my to create an Emergency fund to take care of any unforseen emergency (specially he job loss).

My wife and self, both are working and net take home a salary of 1.75L per month. We have recently booked a flat and have utilised all our savings to pay our part. Presently we are paying only the pre-EMI of loan and shal take about 18 more month for full EMI to come into force.

I wish to create an emergency corpus of 6 lakh within next 18 months so as to take care of 6-7 months of emegency period, if need be. Total outgo as of now is about Rs.1.2 Lakh per month which includes house rent, household expenes, pre-EMI, payments towards investment such as insurance premium and 2 SIPs (just started for Rs.5000 a month in 2 MFs).

Assuming, I create the desired emergency fund in 12-18 months, than what do I do with this amount? Should I keep it in Savings a/c or do an FD or park in a debt fund or is there any other option to keep it safe, earning small interest and also be able to take out in case of sudden emergency?

Request your suggesstions.

Just to add, I have already taken care of life insurance via term plan for self and wife, family floater health insurancne and additional top up plan.

Regards

Ashish

 

15 replies on this article “Emergency Fund – What to do with it?”

  1. Dear Ashish, in your case, invest in Templeton India Floating Rate retail. For your wife, cash management savings is OK.

    Rest already discussed by all hence not commenting any more to confuse you. πŸ™‚

    Thanks

    Ashal

  2. Ashish says:

    Dear All,

    Thanks for your inputs. Your suggestions are valueabl to me and somewhat relating to what I have planned. This means that I am on right track.

    @Ashal: I have invested in Franklin India Bluechip (just started 2 months back) and HDFC Prudence Fund. I could not find liquid fund from Franklin (from the list given on Valueresearchonline.com). So I am thinking of looking at HDFC Cash Management Savings. Please suggest if it is right choice. It is simply based on rating given by value research. My SIPs are going in Franklin and my wife’s SIPs are for HDFC Prudence.

    @Manish: I did think about making RD for 50K, but than continuing it for 12 months may be a little tough and that’s why I limited it to 25K. I shall raise it to max 30K. I am banking with HDFC Bank and a PSU Bank. So for I-wish, I need to open an additional account with ICICI Bank.

    @FFC: Since its a short term investment to arrive at an emergency corpus of 6 lakh, I understand that I need to pay taxes and I am up for that.

    @Ayush: Thanks for your inputs. Wish government allow us to get an exemption on income tax for emergency fund. πŸ™‚

    Regards,

    Ashish

  3. Ayush says:

    @Ashish I find manually buying units in liquid fund every month more flexible for saving for very short term goals. Its just my personal thinking. Going for RDs is not a bad idea either. RDs just makes you more disciplined and committed for saving for very short term goals. iWish from ICICI Bank is a good option for that.

  4. Ayush says:

    Okay Article by Manshu of One Mint says, “Banks don’t deduct tax at source on RDs but the interest itself is taxable like other interest income. It will be added to the rest of your income and taxed at your slab.” So RDs are taxable. Anyways i would prefer Ashal’s way of investing the EF. πŸ™‚

  5. Ayush says:

    I don’t know if i am right, income from RDs is taxable in hand. Correct me if i am wrong.

    1. Yes Ayush

      RD income is taxable in your hand , just that TDS is not cut by bank .

  6. Ayush says:

    As far as i know TDS is not deducted in RDs. Also liquidity should be the first priority of a Emergency Fund. Arbitrage Funds used to be good before. I recently came across this article by Value Research. Here is the link, http://www.valueresearchonline.com/story/h2_storyView.asp?str=16999

    1. Thanks for the link Ayush.

      The main disadvantage of using them for emer. fund is
      “They are open for subscription and redemption for only a few days in a month.”

      Returns are never a problem. They are tax -efficient and theoretically (only theoretically though) are risk free.
      They are still good enough for short term goals

      RDs for small amts are find. I will not do one for 50K a month.

  7. Ashish I think your decision of opening a RD for same is best . All you need to do is open a 50k RD (if possible) and let it run for a year , so that you accumulate 6 lacs . If you think that you cant commit to a fixed amount each month , then I suggest that incase you have a ICICI bank account, then open a “iwish” goal in that saying “Emergency Fund of 6 lacs” and as and when you have any money , just allocate it to that goal . In ICICI , iwish is a new facility for this kind of short/long term goals . Very nice one .

    Once you have that emergency fund , I suggest you keep 75% of it a debt fund (1st priority) or a online fixed deposit (2st priority) and rest into a saving bank account .

    Manish

    1. Hi Manish, I will do it just the way you have suggested. However in general for a person in the 30% slab this does not sound tax efficient.

      1. Pattu

        I have not looked at the problem from tax efficiency point of view. One can look at it , but I personally feel, its over optimizing things . We can skip the emergency fund planning evaluation from taxation point and put more stress on easy access and from restructure point of view.

        However on a second note, I think even this plan which I suggested (75% debt fund + 25% saving) is decent enough from tax planning perspective . What else would you suggest from your side ?

        Manish

        1. I see your point. I guess it depends more on the emer. fund value than the slab. A sip into the liquid fund should get rid of the RD tax issue.

          Recently I have been reading up on arbitage funds and their risk level is higher than liquid fund but comparable to ultra-short term funds. Performance wise the only MFs not to have shown negative returns EVER over a quarter or year are only liquid funds and arbitage funds.
          So if I park about 30% in SB acc, 30-40% in liquid fund and rest in an arbitage fund and try not to touch the abrbitage funds within a year, then long term capital gains are tax-free from it.

          Arbitage funds are also an excellent choice for low-priority short-term goals (>1 yr). A camera or a hike as you mention in your book

  8. Dear Ashish, your are thinking right. Regarding liquid fund, please invest in the same AMC where you & your wife are also having Eq. exposure. For example You may invest in Quantum Liquid if you are investing in Quantum Long Term Eq. fund. Similarly for your wife.

    Thanks

    Ashal

  9. Ashish says:

    Dear Ashal,

    Thanks. As I said, presently the monthly outgo is about 1.2 lakh and I can straight away save 50-60K per month. Therefore in next 12-18 months I can save this 6L.

    Till the time I accumulate this amount, I plan to do the following:

    1. Open an RD for 15 months, investing 25K each month. This is giving 8.75% p.a. interest in HDFC Bank

    2. SIP of Rs.10K per month in 2 liquid funds for 12 months each (which means investing 20K a month) – Not yet shortlisted and need some suggestions on this.

    3. Balance keep in Savings account and let it accumulate.

    You have suggested invest 2+2 L in liquid funds, can you please suggest 2 liquid funds so that I can start SIP in these funds from hereon and later on move money from RD and savings to the liquid finds in question.

    Regards,

    Ashish

  10. Dear Ashish, how you are planning to accumulate this emergency fund? I mean during next 12-18 months, where ‘ll you keep till you reach the corpus of 6L Rs?

    Once corpus is created, split it into 2 parts of 2L Rs. & 4L Rs. Keep 1+1L Rs. in SB account for both of you linked with FDs (Sweeping FDs). For remaining 4L Rs. invest 2+2L Rs. in both names in liquid funds.

    Thanks

    Ashal

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