Being ready is the first step toward financial stability, and one of the best ways to keep ready is to set up a strong emergency fund. Life throws us curveballs all the time, including an unexpected medical bill, losing a job, having to make urgent repairs to your home or automobile, or even having to travel for an unexpected reason. If you have an emergency fund, you can deal with these kinds of problems without getting into debt or putting your long-term financial goals at risk. Lets look into top five reasons why liquid funds are ideal for emergency savings in this topic
A lot of individuals save their emergency money in regular savings accounts or fixed deposits, but these might not always be the best method to get the right mix of safety, accessibility, and rewards. That’s when liquid finances come into play. A liquid fund is a kind of mutual fund that mostly buys short-term, high-quality debt securities like treasury bills, certificates of deposit, and commercial papers. These funds are a great way to establish an emergency fund because they are easy to get money out of, have little risk, and give decent returns.
Top 5 – Reasons Why Liquid Funds are Ideal for Emergency Savings
Let’s look at five important reasons why liquid funds are a great choice for your emergency savings.
Ease of Access and Liquidity
In an emergency, having cash on hand is the most important thing. In a crisis, being able to get to your money quickly—sometimes within hours—can make all the difference. Liquid funds are a good moniker for them because they let you get to your money right away or almost right away.
Most liquid funds can handle requests for redemption within 24 hours. This means that if you ask for a withdrawal today, the money will usually be in your bank account by the next business day. Some fund companies have gone even farther by offering immediate redemption services. This lets investors take up to ₹50,000 or 90% of their investment (whichever is smaller) right away using certain applications or websites.
Many other investing opportunities don’t have this level of accessibility. For instance, fixed deposits may incur fees for taking money out too soon, and equity investments are exposed to market fluctuations, which could drive you to sell at a bad moment.
Liquid funds, on the other hand, find the proper mix. They are easy to get to quickly without sacrificing too much on returns or stability. This makes them great for emergencies, when every second matters.
Safety and Low Volatility
The basic goal of an emergency fund is not to get the best return on your money, but to keep it safe and easy to get to when you need it. So, safety and stability are not up for discussion. Liquidity funds do well in this area because they put money into short-term, high-quality debt instruments issued by trustworthy organizations like the government or big companies. These securities are less affected by changes in interest rates and have shorter maturity periods, usually up to 91 days. This makes them less affected by changes in the market.
Because of this, the Net Asset Value (NAV) of liquid funds stays rather steady. You won’t witness big swings like you would with stock mutual funds or even long-term debt funds.
Also, the Securities and Exchange Board of India (SEBI) has created tight rules to protect investors in liquid funds. Fund companies must keep a portfolio that is well-diversified, minimize their exposure to lower-rated assets, and follow strict rules for managing risk.
In summary, liquid funds provide you piece of mind because you know that your emergency fund won’t be affected by changes in the market or unanticipated financial shocks.
Higher Returns than Savings Accounts
Your emergency fund should work for you silently in the background, even though safety and accessibility are quite important. It may seem easy to keep all of your emergency money in a regular savings account, but the interest rates are usually low, approximately 2.5% to 4% per year (depending on your bank).
Liquid funds, on the other hand, have historically given greater returns, usually between 5% and 7% each year, depending on how the market is doing. Returns are not guaranteed, but they have always done better than normal savings accounts over the long term.
This larger yield can make a big impact. For instance, if you put ₹2 lakh in a savings account with 3% interest, it would rise to ₹2.06 lakh after a year. If you put the same amount in a liquid fund that earned 6%, it would grow to ₹2.12 lakh in just one year, which is ₹6,000 more than the other option, without considerably increasing your risk.
Over time, this compounding benefit helps you build your safety net faster, making sure that your emergency fund is still enough to cover rising costs of living and inflation.
Low Costs and Few Exit Fees
Another important benefit of liquid money is that they are cheap. The cost ratio, which is the annual fee that fund companies charge to manage your money, is usually quite low for liquid funds, usually between 0.1% and 0.3%.
These funds also have low exit loads. According to SEBI’s rules, an exit cost only applies if you cash out your investment inside the first seven days. Even then, it’s quite little, between 0.0045% and 0.0070% of the amount taken. You can get any sum back after seven days without paying an exit load.
This makes liquid funds great for keeping money for a limited time. You can be as flexible as you like without worrying about large fines or hidden fees. Liquid funds provide you entire freedom to get to your money when you need it, with no strings attached. This is better than fixed deposits (which may incur fees for early withdrawals) or recurrent deposits (which demand fixed commitments).
In short, liquid funds let your money keep working for you without tying it up or charging you a lot of money.
Options for Flexible and Systematic Investing
You don’t have to build an emergency fund all at once. For most people, it’s actually better to build it up slowly over time, and liquid funds make this straightforward and flexible.
You can start putting money into a liquid fund with tiny sums, like ₹500 or ₹1,000, and then add more money as your income goes up. A lot of fund companies provide Systematic Investment Plans (SIPs) for liquid funds. These plans let you invest a set amount of money on a regular basis, such every week, month, or quarter.
This disciplined way of saving helps you get into the habit of doing it regularly. Plus, as SIPs average out the cost of your purchases over time, you also lessen the effects of short-term changes.
You can also utilize Systematic Transfer Plans (STPs) to shift extra money from your liquid fund into equity or hybrid funds once you have enough money in your emergency reserve. This helps you get the most out of your investments while making sure your emergency fund stays safe.
If you want to attain your target corpus, which may be three to six months’ worth of your basic needs, a SIP calculator can help you figure out how much to invest each month. Regular reviews might help make sure your fund is big enough as your costs change.
Conclusion
Emergencies don’t give you a heads-up before they happen, but how well you handle them depends on how financially ready you are. You get the best of all worlds by putting your emergency savings in liquid funds:
- You can get cash quickly when you need it most.
- Safety and stability of capital,
- More money back than a regular savings account,
- Low costs and freedom and The ease of making regular investments.
These attributes make liquid funds the best way to build and keep an emergency fund that is both easy to access and useful.
It’s a good idea to examine different liquid funds, look at their portfolios, and look at their past performance and expense ratios before you invest. You can also talk to a financial counselor to make sure that the fund you choose fits your risk tolerance and need for cash.
May you get one step closer to financial peace of mind by starting today. You will know that your emergency fund will be there for you when life throws you a curveball.