A Fund For Emergencies

Hemant Rustagi
Chief Executive Officer, Wiseinvest Advisors 

Investing is a process that begins when you start investing and ends when you complete your time horizon for each of your investment goals. While having a clear idea about your horizon helps you decide your asset allocation, it is equally important to continue investing through your defined time horizon so as to get the best out of the chosen assets.Although investment is an on-going process, there is no straight path to investment success. Hence, you must be prepared to tackle financial challenges that could threaten to derail your investment process.

We are currently facing an unprecedented situation due to the virus pandemic that has disrupted the financial aspect of our life in more ways than one. It’s precisely for times like these that one must have an emergency fund. It’s also important to set aside an adequate amount as an emergency fund. Ideally, an amount equivalent to at least six months worth of your living expenses should be earmarked for this purpose. Having a robust emergency fund allows you to continue your investment process even when you are faced with a financial exigency.

There are a few other things that must be considered while creating an emergency fund. Investment earmarked for this purpose should be kept in a liquid form so that you can utilise this money when required without having to worry about the vagaries of the market. Also, emergency fund should be used for genuine financial emergencies rather than those expenses that may not qualify as financial exigencies. It is quite possible that despite doing everything right, you may still be faced with a situation when the emergency fund gets fully utilised.

There can be two scenarios here. First, the period of uncertainty gets over and hence you would be required to rebuild the emergency fund. Second, the period of uncertainties continues and hence the need for additional emergency fund arises. In the first situation, you must start accumulating an emergency fund at the earliest by putting some money aside on a regular basis and even use a windfall as a lump sum investment. The second situation can be a little tricky as there would be no fresh inflows that could be used for this purpose.

In such a situation, you need to consider alternatives that may help you tide over it. For example, you must aim to reduce expenses by cutting on the discretionary ones. If you follow this process in a disciplined manner, the gap between what you have and what you require can be narrowed to an extent. You must avoid easier but costly options like excessive use of credit card as that can be a sure-shot recipe of getting into a debt trap.

Also, relook at those short-term goals that can either be postponed or avoided completely. If need be, putting investment on hold for a long-term goal like retirement, especially if retirement is 10-15 years away, can be considered. As is evident, having a robust emergency fund is a must. Here are a couple of options that can help you earn higher return than bank savings and that too without compromising on the liquidity.

Overnight Funds

Overnight mutual funds invest predominantly in overnight assets and securities. At the start of every business day, the funds are held in cash. Being open-ended, you can enter and exit these funds by putting in your redemption request before the cut-off time on working days.

Liquid Funds

Liquid funds’ aim is to provide easy liquidity, preservation of capital and moderate income by investing in short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes may fluctuate more than overnight funds but much less as compared to debt funds that have portfolios with longer duration. Besides, liquid funds have an exit load if the money is redeemed within seven days.