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POSTED BY ON November 22, 2011 6:53 pm COMMENTS (3)
One of my friend has this question to me as i keep posting articles about Financial Planning in my FB page.
He has no emergency fund in place and nothing big as saving other than EPF and misbought ULIP which he is still continuing as he finds that he paid all charges up front.
Now he want to actively invest for his various goals.I told him he will need few things in place like
Emergency Fund
Term Insurance
Health Insurance
So after going through his expenses he has about 10-12K a month for his investment goals. He said he is going to create RD of about 4K for creating Emergency Fund.
Rest 6K in Equity MF for various goals. After Emergency Fund is in place he will include that 4K also into investing for future goals.
He said 3 months of expense as EF . His monthly expense include Home EMI about 25k + Household Expense 8K + other misc 5K
25+8+5=38K*3= 1.14L as EF
I advised him to keep aside at least 6 months as EF ie 38*6=2.28L+buffer and round off =2.5L
Now the question is with 4k in RD it takes approximately 5 years (60 months) to create this EF
Instead if he put in all of 10K surplus in RD it will only take 2 year to create same amount .
I suggested him to put in 10K and make sure EF is in place first. But he doesnt want to miss out on opportunity available in market due to uncertainty to purchase more units with low NAV in his MF Funds
So What is best Keep 4K RD and create EF within 5 year (put in yearly bonuses will bring this to 3 years)
Or
RD for all 10K and create EF under 2 years (may be in 1.5 year)?
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Dear TheZionView, My take – what ‘ll happen to investing in MFs & paying EMIs of home loans & regular living expenses, if there is a job loss or accident etc. due to which this fellow is not in position to earn for few months.
If he is comfortable with the idea of living on the edge of the sword not only for himself but for his family also, God save him & his family. Creating a sound base below your feet is a prerequisite before you want to jump high.
Thanks
Ashal
Hi
Emergency fund need to be highly liquid… please dont go for RD.
I guess the investor is so conservative.so i suggest him the below one
He can go for a sweep account . i shared u a link
http://www.moneysavingshelp.com/2011/bank-2/how-to-get-higher-interest-on-your-savings-account/
Short explanation:
U are allowed to specify a particular amount above which it will be swept from your savings acc on a particular date of the month and kept in fixed deposits for every 1000 units. Their lies the advantage. say 10000 swept from my account i am withdrawing 1000 remaining 9000 will be getting the fd interest. Till the date when u with draw 10000 will be given fd interest.Many banks are offering this different names.
Eg. sbi saving plus account —Multi deposit option
This is a must one for every induvidual.
As the interest incurred on fixed deposits and RD are taxable.If he chooses this fixed deposit (Sweep account) he will get more interest and no penal interest will be deducted if you withdraw it intermediately.
This solves the purpose of emergency fund and also earns highest interest rate.
Shortcomings with the RD:
U cant take out immediately (u are allowed with some interest deduction).
less interest than fd.
In both the cases we need to pay tax on the interest. then why should he go for low interest scheme?
if he wants some other option
1. liquid funds and debt funds….
In this uncertain world we need to keep the emergency fund and that too liquidity is also important.
Happy Investing!!!!!!!!
Hi Zion,
I would suggest go for Rs.6000 R.D @ 8.5% for 24 months, the maturity amount would be Rs.157000/- approx. The rest he can put in equity MFs for SIP as the markets are also reasonably valued and he should not miss out on the equity markets growth. As MFs are also liquid, he can redeem as and when required in emergency. Also if I consider just an avg return of 12% on equity MF SIP after 24 months the amount would be Rs136000/-. So this solves the purpose of emergency fund in 2 yrs. And he also doesnt miss out on both the investments.