Why Emergency Funds Need Liquid Fund

  Author: Kundan Kishore

Liquid mutual funds or liquid funds invest the money of investors in short-term debt and money market investments. This helps mutual funds to ensure that your money is easily accessible. This also makes them great candidates to help you during emergencies and be part of your family’s emergency fund. Here are some things that you need to do.

Take advantage of their liquidity and safety Liquid funds provide what you need for investments earmarked for emergencies—safety, liquidity and stable returns. All this can be attributed to the investments they make.

Make adequate liquid fund investments Usually, 3-6 months of household expenses should be adequate. However, you can increase the amount with addition of aged family members, your own age and new family members like newborn children.

Use SIPs in liquid funds Make regular investments using systematic investment plan (SIP) to build an emergency fund. This will make sure that you have this pool of contingency fund without having to disrupt other aspects of your family finances, be it regular expenses or investments.

Go for a tax efficient option

If you are in a lower tax slab, go for the growth option of a liquid fund. Otherwise, opt for the dividend re-investment option. This will ensure that you pay minimum tax on your emergency fund.

Every family needs an adequate emergency fund. Liquid funds can play a very important role in ensuring easy access to your money along with tax-efficiency for these liquid investments.