An emergency fund of Rs 5 lakh can be divided between a savings account, fixed deposits, and liquid mutual funds. This will ensure the money is available when needed, but it's important to understand the risks, interest rates, and withdrawal terms before investing.
Where to keep Rs 5 lakh for emergency: FD, savings or liquid fund?
If you suddenly lose your job, face a medical emergency, or face a major household expense, the most important need is money that can be withdrawn quickly and without any hassle. This is why creating an emergency fund is considered essential. But if you have savings of Rs 5 lakh, where would it be better to keep it? In a bank savings account, a fixed deposit (FD), or a liquid mutual fund? It's important to understand the benefits and limitations of these options before choosing the right one.
Keeping a portion of your emergency fund in a savings account can be useful. The biggest advantage is that the money can be easily withdrawn when needed. If you need to pay a hospital bill or make an urgent payment, you don't have to wait to redeem your investment. However, interest rates on regular savings accounts can be relatively low. Therefore, keeping the entire amount in this account may limit your chances of earning better returns.
Fixed interest option on FD
Bank fixed deposits can be useful for those who want to earn a predetermined interest rate on their funds. Interest rates vary by bank and deposit period. However, it's important to check the premature withdrawal requirements before investing in an FD. Withdrawing funds before maturity may result in penalties or reduced interest rates. Therefore, it's not convenient to keep your entire emergency savings in a long-term FD.
Liquid Mutual Funds
Liquid mutual funds primarily invest in short-term debt and money market instruments. Withdrawals are relatively quick, but the funds may take time to arrive in your bank account. Their returns are market-linked and not guaranteed. Therefore, they should not be considered a completely risk-free option.
How can I divide Rs 5 lakh?
For example, an emergency fund of ₹5 lakh can be divided into three parts, suggests Adhil Shetty, CEO of BankBazaar:
1 lakh in a savings account to meet immediate needs.
2 lakh in an FD to earn interest based on fixed terms.
2 lakh in a liquid mutual fund with the option to withdraw funds as needed.
This is just an example; this isn't necessarily the same distribution for every individual. The right ratio will depend on your monthly needs, job stability, and risk tolerance.
Safety is not the highest return, it is the priority
The purpose of an emergency fund is not to maximize profits, but to provide financial support during difficult times. Therefore, when choosing an investment option, prioritize availability of funds, principal protection, and withdrawal conditions. A balanced mix of savings accounts, fixed deposits, and liquid funds can be used based on your needs.
