An emergency fund is like a precautionary fund which you need to keep, maintaining at least 3 months to 6 months of your expenses. Here are five different ways you can keep your emergency fund:
Liquid funds or short-term debt funds: You can earn up to 6% or 7% return, but the returns are market linked. You never know when you might need the funds. In such a case liquid funds can serve the best because you can easily withdraw money from liquid funds. Liquid funds or ultra short term funds provide better flexibility and tax efficient returns if you haven’t withdrawn money from the scheme for a longer time.
Payments Banks: Airtel has launched its payments banks where you can keep your emergency fund upto Rs.1 lakh. Suppose you are spending Rs.30,000 monthly on your household expenses, then you can easily keep the amount in payments bank because it offers you a return of 7.25%. India Post has also launched it’s payments bank and Paytm is also going to launch it’s payment bank pretty soon.
Fixed Deposits: Fixed deposits are another option. They provide a return of 6% to 8% depending upon the tenure you are opting for. The only concern related to FD’s is that interest income is taxable. Moreover, in the case of premature withdrawal or breaking of FDs, you have to pay penalties also. This may reduce the earning interest on your emergency fund. However, they provide assured returns.
Savings Bank Account: Money kept in a savings account is always available for use, you only require a medium like ATM card, cheque book or need to visit the bank to withdraw money. The return is quite low at 4% p.a.
Cash in Hand: The simplest way is to keep three times of your household expenses including your personal expenses in the form of cash. Now, with the release of Rs.2000 note, you can easily maintain your emergency fund at home. This money will help you in meeting any sudden crisis. Keeping cash is the quickest way to use funds in necessity. However, you won’t earn any interest over it and safety precautions have to taken while keeping cash in hand.