I have shortlisted 3 options for keeping emergency fund of around 5 lakhs.
I feel FD is the best. what’s your opinion on this?
The emphasis is on the word emergency. So when an emergency occurs, you should be able to get your hands on cash quickly, so liquidity comes first, everything else second.
A premature closure of FD in a nationalized bank like SBI is quick, although you pay penalty. Some liquid funds have instant redemption option, but that I think is up to 50,000 only. Understand how arbitrage works and then invest in them if you want.
Also, keep some hard cash with you, as part of such a fund. You will not gain any interest but nothing beats cash.
So go for simplest products with focus on liquidity, you may get lesser returns, but emergency fund is not about returns. We can work on getting higher returns elsewhere.
Current yield is around 5%. STCG on debt is as per slab. Also, if held for 3+ years, then LTCG + indexation applies and since we basically have negative real yields these days you can actually mark it as loss.
I put some in bank and some in liquid funds. Even redemption from Z gets into bank next day 7 am, so faster than liquid funds after 50k. Liquid funds you can distribute to 4-5 funds to get more money out of instant redemption. But have some in bank too.
After a terrible experience of LVB bank announcing moratorium , sleepless nights . I would prefer liquid bees ETF or overnight funds .
Liquid fund and arbitrage fund are out of question. They have risk component added to it.
Probably safest FD is SBI(heard so many scams but never heard of moratorium or serious issues to banking operations) but I have doubts. Rest of psu banks are riddled with scams and they are gonna privatize soon. If you knew the way bank works you won’t would think FD is safe .
Have insurances along with your emergency fund.
Keep it as FD in a PSU bank of your choice and sleep peacefully.
For an emergency fund, liquidity is key. The main reason to have an emergency fund is to get instant liquidity in case of emergencies. I would suggest a mix between liquid funds and cash in hand. Although the cash will not be earning much, but from an emergency fund POV, it will be best.
These are my personal views
Do note at present few banks offer Interest rate as high as 6% on SB account. Hence it is ok to park the money in SB account as well. Open a separate bank account for this purpose and do not mix your normal banking transactions through this in case you opt for this option. The entire money will be in SB account and you could use it as and when an emergency occur.
However, I will keep the entire money in Bank FD as Interest rate are locked for longer period. Any bank which offers the highest rate will be ok as the deposit is covered by Insurance upto 5 lacks. This does not mean that I will put it in a unknown or very little known bank irrespective of the deposit cover.
Once the FD is placed, I will ask the bank to grant me an Overdraft against the deposit. This will ensure that liquidity issue is covered. Do check that the bank offers online banking etc…
It is pointless to close the deposit and lose accrued interest on deposit in case of emergency wherein the money can be replenished within one or max two months. Hence the OD facility will be of help. No interest will be charged as long as you do not take the money and there will be no processing fees as well. Interest is calcuated on the daily balance. However do note that the FD will be under lien.
If I want to be extremely conservative, I will do the following:-
Open FD of 250,000
Open FD of 100,000
Open FD of 150,000
Against the FD of 250,000 I will ask for the OD. The remaining FD will be without any OD. In case of an emergency and if you think you will not be able to replenish the money, then better to close these 100,000 FD and use it instead of paying Interest on OD.
In case of an emergency, the first choice of payment will be using your credit card if the specific emergency can be met by credit card. This will give you 45 days of free credit based on the date of the emergency (Again I am assuming that you are disciplined and settling the entire debt on due date, if not do not even think of this option).
Few points to note when you place funds in FD.
In my view, people do not take emergencies very seriously and hence it is critical that if you do place the deposit, you should not use it for any other purpose other than emergency. I have seen people dipping into this pool when there is massive correction in stock market or for trading.
Also remember, the emergency fund which you have created is for YOU and your family ONLY. Again seen people giving out money from this emergency fund to friends and relatives and then running after them to repay the same. The core purpose of creating this fund is lost. It is perfectly ok to be selfish in this front.
Disclaimer: These are my personal views and fully believe that I will not go after incremental returns by investing in bonds, etc. I will choose FD. I am ok even to pay taxes. After all you pay taxes on the interest earned.
This is the best advice I feel.
Don’t complicate this, keep it simple even with FDs. Making FDs for emergency, and if a situation arises, break the FDs with no second thoughts, irrespective of the return, penalty, tax and other such things.
I would agree with neha point to point. ADDITIONALLY, take a credit card as well. If your salaried then you can easily get credit card or get a free credit card against FD. Credit card qre very useful if managed well. You will get free loan for 55 days also credit rating get increased if paid full due on time( auto debit works well)
FD is the best choice if you ask me. Also make sure to go for a nationalised bank in this case. We don’t really keep much cash these days but if you can keep some at home that will be good too.
What is we keep the fund in and SB account but opt for Aut sweep of the same amount that would give an interest of FD but liquidity of Savings… how does it sound @Nathiarasan @GB26
I have kotak account and for me no penalty on early redeem of FD’s for my account variant.
so i have created multiple FD’s of 25K each.
Like I said, this is for an emergency fund. There is nothing beyond emergency, so it is better to keep it simple. A FD is simple, a straight forward product.
Of course, these are personal choices, so we can do whatever we want. It all depends on personal situation.
Are you sure? I mean, did you know the interest payable on FD at the time of making FD, and how much you got if prematurely closed a FD?
Of course this could be an offer to make people deposit money with them, just like a 6% SB account.
No penalty means, that is good.
The way bank calculates interest on FD when there is a premature FD request is as follows:
Day 1 - Interest rate on FD for 3 months = 5%, 3m to 1 Year = 6% and for 2 Year = 7% (Assumption).
Day 1 - Cutomer opens the FD for 2 year at 7%.
After completion of six months, if the customer request closure, the bank will check the number of days the FD was open i.e in this case six months. What was the rate on Day 1 when the FD was booked for six months - it was 6%, Customer will get FD rate at 6% for the number of days it remained less penality if there is one. Few banks will allow waiver of penality based on the customer relationship.
The above is for resident customers. For NRE deposits of non residents, NIL interest is paid if the fD is closed within one year of opening.
I had my own calculations in the past for the penalty, based on number of days completed, number of days remain till maturity.
My limited point is that, for emergency corpus FDs, we don’t have to bother about all of this, make a simple FD for 6 months or 1 year, close it if need be, pay the penalty, pay the tax. Keep it simple here.
We can be adventurous with other investments and trading, as there are countless products available in the capital markets 
In my case, HDFC reduces rate of interest by 1% in case of pre mature closure of FD. Suppose I book the FD at 5.5% for 1 year and close it after 6 months. Then the bank offers interest at 4.5% pa for 6 months
Offering high interest rates, not levying penalty, these are all part of capital plan I guess.
Some banks don’t want to levy any penalty so as to keep the customers with them, Kotak does it seems, as mentioned above, and some banks levy penalty when they have adequate capital, SBI also does this.