I need your help. I want to build my emergency fund. Some friends told me to keep the money in a bank account so that I can use it anytime. Others suggested creating a fixed deposit (FD). Some people advised against investing in an FD and recommended investing in an ultra-short-term fund instead.
Please help me decide which option is best for me.
If I need this money for a medical emergency, how can I redeem it instantly if I invest in a short-term liquid mutual fund?
Is there any liquid mutual funds with instant redemption facilities?
but even that has 50k limit per day and need separate management and website. they can suspend redemption any time.
“Emergency” fund should not be “invested”. Capital protection and redemption is priority.
Many banks offer online FD creation and online instant redemption.
Pick any decent PSU bank, make multiple small FDs and keep their app downloaded and password ready
Or enable auto sweep if you want. This can deposit/restore funds automatically when it goes below/above a threshold.
i have a Home Loan from SBI. The loan is overdraft (SBI Maxgain) in which you can put any additional amount and take it out using net banking when needed.
the home loan interest is 9%
this means any additional amount kept in the loan is saving 9% interest.
i am parking my emergency funds in this Home loan account.
If your need is to keep a reserve for emergency, then the priority is liquidity and immediate access to money. Returns are secondary
However, being human, returns do factor in.
Your option
Place funds in sb ac of banks who offer high sb interest rate like equitas, ujjivan as long as the fund is below 5 lakh
If above 5 lakh place it in a bank who offer good rate and get a od line against it.
The od should be available online and if possible get atm card as well
In case of an emergency you can draw on the od. However do note once the emergency is over and if u can settle the debt in a week or two week time, then let the od be overdrawn. However if u thing you can settle the od only after 6 months or so, then go to bank and settle the fd against od. No point giving interest to the bank.
Also in case of hospitalisation or where credit card can be used, use the card first only for hospital bills etc. this gives u free credit period as well provided u are paying 100 percent of dues on the due date. Never take cash from credit card.
You can even sign 15g form so that tds is not deducted by the bank if u are eligible to do that.
These are my personal views.
The above is for a disciplined person as you will have cash balance in ac snd should not touch it. It is only for emergency. Not for a person who thinks indus bank share fell by 20% and i will use this funds for a week or so. Then the option is, do the above in your wife name and only she has access to this. Again, she should be disciplined.
Its quite tempting to see stock falling 20 % and u have cash…. I hope u got the point
A very contrarian view. I know some of us would not like it.
How much your emergency fund goal? Does it satisficed by your credit card limit or can you get the limit hiked so that there is always cushion in credit card equal to your emergency fund target.
Use your credit card for emergency like medical for instant payment. Now within 2-3 working days you can redeem FD or short term liquid fund to settle credit card.
Think this way we expect emergency a rare event. you will park emergency money in long term FD or liquid fund (depending on which you are comfortable with) . Hopefully you will enjoy great interest on FD or differ tax payment in case of liquid fund. Just incase emergency hits swipe credit card, which is far more instant than breaking FD or redeem liquid fund, take out cash, pay the amount just to start treatment. Once you heave breathing time break FD/liquid fund to pay credit card.
TLDR; use vehicle which you are comfortable with out worrying about how instantly money can be withdrawn. Use credit card for instant payment and use emergency fund to pay credit card.