Having a reliable emergency fund is the best way to ensure financial security. You can use it at a moment’s notice to address unexpected issues, such as medical problems, job loss, or major repairs. Among various options available for maintaining emergency funds, liquid funds could be one of them. Here are the five reasons why investing in liquid funds to help create your emergency corpus makes sense.
- Ease of access and liquidity
When an emergency occurs, accessing your money promptly is crucial. Liquid funds invest in short-term, high-quality debt instruments, allowing you to withdraw your funds within 24 hours. Many also offer an instant redemption facility, up to a certain limit. Quick access is a key reason why liquid fund investments could be suitable for emergency funds.
- Safety and low volatility
The main goal of an emergency account is to safeguard your capital, rather than accumulating a large sum of interest. Liquidity funds are relatively safer investment instruments when compared to equity funds. Their net asset values (NAVs) generally show minimal fluctuation, and they don’t face sudden rate changes, offering a comparatively stable haven for your emergency corpus.
- Higher returns than savings accounts
When you opt for liquid funds over a savings account to create your emergency corpus, you benefit from a comparatively higher return. While savings accounts earn minimal interest, liquid funds have historically delivered better returns, thereby building up your emergency fund.
- Low costs
Investing in liquid funds is cost effective, as most funds have low fees. Do note that SEBI mandates a small exit load if you redeem before 7 days, usually ranging from 0.0070% to 0.0045%. However, after 7 days, there are no exit loads. This means more of your money stays with you, and you don’t lose value when you need to access it quickly for emergencies. Unlike other financial products, such as fixed deposits or other types of funds, liquid funds are flexible.
- Flexible and systematic investment
You don’t require a huge corpus for liquid funds. You can start saving for an emergency with small amounts and gradually increase your investment by means of systematic investment plans (SIPs). This makes it feasible for you, irrespective of your profession, to build a safety net at your own pace. An SIP calculator and periodic reviews are essential to monitor your progress toward your ideal emergency corpus.
Conclusion
Investing in liquid funds to create an emergency corpus provides access to your money when needed, offers safety, and attractive returns. This mix ensures you are always prepared for an unexpected situation. Research fundamentals and shortlist your pick of liquid funds to begin creating your emergency corpus today. You can also reach out to a financial advisor to ensure your funds align with the corpus you have in mind.
