Build an Emergency corpus with Liquid Fund

Diversification of a mutual fund portfolio is the key to effective financial planning. For example, if you have to save taxes, you may want to consider investing in an ELSS fund. If you have a long term goal to achieve, then you may want to invest in an equity fund other than ELSS. On the other hand, to meet medium term goals you may choose to invest in balanced funds. If your goal is to build a retirement corpus, then you may have to look out for solution oriented funds. Although these mutual fund options may seem lucrative in terms of diversifying your mutual fund portfolio, a lot of investors miss out on the fact that they need to have an emergency fund which they can use to tackle emergencies.

Why is having an emergency fund important?

Building an emergency corpus is necessary because you are bound to need money during unexpected or unplanned scenarios. It may be considered as an essential part of an investor’s portfolio as this fund should hold the potential to help an individual recoup during financial shortfalls. An emergency fund is a fund on which one should be able to rely on without having to worry.

Can liquid funds be used for maintaining emergency corpus?

As per SEBI’s circular dated 6th October, 2017 a liquid fund must invest in debt and money market securities with maturity of up to 91 days only. Because these funds invest in fixed income securities that have such a short maturity period, they are considered to offer a decent amount of liquidity. The prime reason one builds an emergency corpus is that they should be able to liquidate the fund immediately during emergencies. Hence, Axis Liquid Fund might be used for allocating an individual’s emergency corpus so that their other mutual fund investments remain untouched.

How to build an emergency fund using liquid funds?

Well, it all depends on how much money you have with you and how much of that you are willing to immediately allocate to an emergency fund. For example, if you want to keep around Rs. 1.8 lakhs in an emergency fund, you can either make a lumpsum investment in a liquid fund (if you have that much cash already saved), or you have the option of starting an SIP investment.

Systematic Investment Plan is an easy and hassle free way for investing regularly till you are able to meet your investment objective. With SIP, all an individual needs to do is inform his or her bank, and every week on a pre-decided date, a fixed amount is debited from an individual’s savings account and electronically transferred to his or her liquid fund. Once you have sufficient money parked in the emergency fund, you may stop your SIP or continue investing depending on your investment objective.

The main thing about having an emergency fund is that you should be able to redeem at your own convenience. So while investing in a liquid fund to build the emergency fund, make sure that the fund offers decent liquidity. Also check the fund’s past performance and invest in a fund that has a proven track record. Make sure that the expense ratio of the fund isn't too high else it might affect your capital gains. Lastly, if you are someone who is completely new to investing or doesn't understand financial planning, feel free to reach out to a financial advisor who might be able to help you in choosing a fund depending on your financial goal, risk appetite and investment horizon.

Axis Liquid Fund

An open ended liquid scheme

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.