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POSTED BY ON January 2, 2012 8:37 pm COMMENTS (4)
Hi all,
I read quite a few articles about how important to have emergent fund for at least 6 months and it should be easily accessible. I completely agree with it and creating such fund is my new year resolution 🙂
I plan to create 2 emergency fund.
Fund – 1 : If my regular salary income gets disturbed, I should have 6 months fund which will take care of my home loan, SIPs, insurance installments and bare minimum monthly expenses.
Fund – 2 : For any medical, family emergency.
My query is, where to invest the amount to create such funds. Simple mode could be having 10 year SBI FD at 9.25% rate. But this may not be the best option from taxation point of view.
Need your expert opinion. Also any suggestions/modifications about my plan to create 2 funds is also welcome.
As always, thanks a lot for your cooperation.
Best Regards,
Kulkarni P
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Dear Vinayak K RR, For the flexi RD thing, we are investing some amount every month & in a sense it’s not an emergency funding tool. To redeem your money you have to go to your branch. Where as in case of sweeping FDs, no need to visit branch as money ‘ll come to account automatically.
thanks
Ashal
u can also go for flexi recurring deposit where the tds is not applicable on the deposit and the money is also accessable easily..provided by few banks…
Dear Kulkarni P, Here are my 2 cents.
Emergency Fund 1 – Put a small part say 1 month expense in SB account. Anything more than this (the remaining 5 months expenses) should be in sweeping FDs. As on date, the 1Y Fd rates are also attractive. Even if post tax return is not attractive no reason to worry, you ‘ll still get a better return than ordinary SB account post tax return.
Emergency Fund 2 – As the time frame of this emergency is not defined & at the same time, you can handle 2-4 days time of fund delay as in the example of dear justgrowmymoney, you may park full amount in Debt fund. For ease of Tax calculation please invest in Growth option only. So in case, no need arise for full 1 year, the return ‘ll become tax friendly Long Term Capital Gains as & when you redeem the same.
Thanks
Ashal
Kulkarni – First up, kudos on your New Year resolution.
The emergency funds by design is for accessing in an emergency. Theoretically the most accessible place is your Savings account as you can access the money via ATM. But just push it a little further – move the fund into a Short term Debt Fund (Remember: Short term fund, not any debt fund). Currently you can get returns of ~ 8.5%-9% but over a very long period returns could be in the range of 8%.
Well, really, emergency funds are for emergency purposes so any return on them is acceptable. ‘Accessibility’ is the main criterion for such funds. In the very worst case scenario if you want the funds on a Friday night and you put in a redemption it will be processed with Monday NAV and hit your account on Tuesday morning – so this is the maximum time you will stay without the money even in an emergency. Again most people have at least 1 month worth expenses lying idle in their savings account so even if it takes 3-4 days one can usually survive.