Options to Invest Emergency Funds

Your emergency fund should be parked in a vehicle that is easily accessible & low on risk. We evaluate some options

Easy accessibility and low risk are the most important factors which should be considered while selecting a vehicle for your emergency kitty. Let's evaluate different vehicles on these two parameters.

Locker at home: Cash is the most liquid of all investments. It is easily accessible and ready to use in case of emergency. The only concern with cash is that it will yield no returns and that keeping it at home may pose safety issues if it is a very large sum.

Do explore owning a credit as you can count on it as an emergency fund because it can act as your lender when in need. This source requires additional care and a disciplined approach to manage credit. But this is suitable only if you can make the payments on time, otherwise, interest costs can be very high.

Liquid Mutual Funds - Liquid funds invest in securities with a residual maturity of less than or equal to 91 days. Investments are mostly in money market instruments, short-term corporate deposits and treasury. Unlike other mutual funds, these funds credit your account with the redemption amount within one business day. Low risk and high liquidity makes them apt for your emergency kitty. And yes, liquid funds can offer you higher returns than your typical savings account. They have recently delivered about a 8 per cent return to investors. Even if this moderates over time to say 6-7 per cent, you still beat the savings account.

Savings Bank Account - They usually earn you a minimum annual return of 4 percent (some banks offer upto 6 per cent) with anytime anywhere withdrawal facility through bank ATMs. This is favoured by most of the investors over other vehicles because of recognized and ease in operation. Banks now offer special Sweep-In facility wherein, the bank automatically switches the amount in excess of a certain level into bank fixed deposit. A certain balance is maintained in the savings account. If the balance reduces as result of withdrawal from the account, the shortage amount is re switched from fixed deposit to savings account. It helps investors to earn higher returns along with the liquidity benefits of a savings account.

Based on your profile and needs, liquid funds can be suitable options. You need not keep whole emergency fund at one place. Keep some amount in home locker or savings bank account and rest in liquid funds.