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Why Indians Must Have Emergency Fund
One should invest in liquid funds because these funds should invest in high-quality short-term credit funds
Photo Credit : Shutterstock
Everyone takes into consideration their long-term financial goals when it comes to personal financial planning, including retirement, the education of their children, and delaying marriage until later in life. However, what happens when there is a crisis, such as the loss of a job or a business, or a pandemic, such as the COVID-19 virus, that prevents people from going to work and earning their living? Regardless of the circumstances, whether it be the loss of a member's job or covid-19, there is no question that our regular household expenses, which include things like food, clothing, and other necessities, will continue indefinitely. The most fundamental aspect of a sound financial strategy is the establishment of an Emergency Fund, which acts as a form of insurance against unexpected events and calamities.
Only 25% of Indians have emergency funds for a rainy day: A recent survey report titled "India's Money Habits" conducted by personal finance platform Phenology collected data from over 3,000,000 Indians and revealed that at least 75% of Indians do not have emergency funds and could default on their equated monthly instalments (EMIs) in the event of a sudden layoff or major event related to income loss. The survey report was recently published. If they were to lose their job, one in four of them would not even be able to cover their monthly costs of living. Over two hundred thousand employees from Ed Tech and other large tech companies have lost their jobs in the span of just one year, with one out of every ten Indians working in that cluster. Expenses account for one-third, or 33 per cent, of pay-day expenditures, while investments make up sixty-seven per cent, or 67 per cent, of pay-day investments. Approximately thirty per cent of Indians have reported that their salary does not even last for 15 days after they have received it. One in six people has debts that are equal to or greater than their assets. Another reason to start creating an emergency fund is to save ourselves from debt because in an emergency we took loans, or use credit cards which ultimately brings us in a debt trap.
Emergency Fund Period: A community of financial experts, advisors, and researchers have determined that three to six months' worth of household expenses should be set aside as an emergency fund to cover unanticipated adverse events and emergencies that may occur in the life of an individual. Three months of an emergency fund is required for a person who is having a stable job like a government job and low monthly expenses while six months of the corpus is required for a person who is having a less stable job and higher monthly household expenses in liquid funds, short-term RDs and a savings bank account that can be easily accessible or converted into cash at the time of urgency.
Emergency Fund Planning: Once you have accumulated an emergency fund as per your need you should not keep it in cash, at least not entirely because you do not frequently have access to it. Therefore, invest it such that you can get good returns without risking liquidity. As with other aspects of life it also needs discipline and consistency to generate the corpus of the emergency fund and once it is being done than it will ultimately provide financial security and peace of mind during the tough and uncertain times. For Example: Suppose you have accumulated Rs.2 lakh as your emergency fund. What you can now do is keep Rs.40,000 in cash at home, let Rs.40,000 stay in your savings bank account and invest the remaining Rs.120,000 in a liquid mutual fund. When it comes to liquidity many liquid funds provide an instant redemption facility up to 90% of the invested amount, or Rs. 50,000. It also prevents an individual from taking debt or selling their long-term investments in dip and disturbs financial goals at the time of emergency.
According to a survey by the financial education company Fin-safe, people are more likely to repay short-term loans like credit cards and EMIs than long-term loans. Another American study by Roll, Stephen, Despard, Mathieu, Grinstein-Weiss, and Bufe found that low-income households with the greatest need for emergency savings benefit the most from tax-time savings interventions. This study was published by Oxford University Press Inc. in 2023. Low emergency savings make people more dependent on cash than credit cards, but they also accrue more debt, making financial shocks more expensive for them. Due to the high rates of credit card borrowing, financially precarious people with little to no savings run the risk of suffering serious financial repercussions from even a brief financial shock.
At last few tips for building an emergency fund corpus for tough times are as follows:
- Start small: It's best to start with a doable goal rather than trying to save a huge sum of money all at once. Putting down Rs. 2,000 or Rs. 5,000 per month, for instance, and progressively raising it over time.
- Try autopay to save for emergency fund: Enable the autopay option in your savings account that will automatically deduct the amount from your account preferably on the salary credit date.
- Save in Liquid funds: Try to generate your emergency fund corpus via invest in good quality liquid funds because they ideally give more returns in comparison of savings accounts, FDs and RDs i.e., 6-8% of returns.
We can conclude by saying that one should invest in liquid funds because these funds should invest in high-quality short-term credit funds. This is the rationale behind investing in liquid assets. These fund characteristics have been improved as a result of recent SEBI regulations. Liquid funds are only permitted to invest in listed commercial paper, and a maximum of 25% of their total assets may be allocated to any one industry. They are prohibited from investing in assets with a high level of risk under SEBI regulations. These standards seek to reduce the credit risk, also known as the risk of default by the company whose papers are held by the liquid fund. A minimum of 20% of the assets of funds that are designated as liquid must be allocated to liquid products (cash and cash equivalents like money market securities). This guarantees that they can fulfil any conditions for redemption as soon as it is humanly possible.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.