Attaining inflation-adjusted returns on emergency funds
There is an unsaid rule of investment management — one should always prioritize safety, liquidity and low volatility over high returns as far as emergency funds are concerned
A prolonged health crisis caused due to the Covid-19 pandemic has put the entire country in a hibernation mode. Rising uncertainty around the economic situation and its impact on jobs and finances add to woes. Those who had saved money for such precarious times have been able to manage the situation slightly better than others.
Even a small amount of your monthly income, if kept aside for an emergency, can play a big role in battling a financial jolt at any point in life. An emergency fund, is thus, known as your life-saving jacket that helps you from drowning during the high tides.
But with every investment, there is a hidden desire for solid returns. People want to receive a huge corpus at the time of maturity of these funds.
Inflation challenge
In a recent episode of Money9 Helpline, someone had a similar query on emergency fund returns.
“Is it necessary that the return of emergency funds beat inflation?” asked Abhishek Mall.
There is an unsaid rule of investment management — one should always prioritise safety, liquidity and low volatility over high returns as far as emergency funds are concerned.
Expert view
“There is a difference between saving and investments. Savings don’t fetch you any returns. On Investment you earn some returns, it will vary from one product to another. Normally we advise our clients that their investments should have returns that beat inflation. But this rule is not applicable to the emergency corpus. The emergency corpus should be liquid, and returns generating from short terms or highly liquid products are less,” said Vinay Taluja, Chief Product Officer of Bajaj Capital.
Taluja further said that as a thumb rule, one should keep 3 to 6 times their monthly expenses allocated for emergency funds. You can put some amount partly at home, some in liquid funds, short-term debts, and bank savings.
There are several other funds that you can invest in to gain high returns but as far as emergency funds goes, one should stay true to its reason of existence. Don’t look for returns that beat inflation, just focus on liquidity and low volatility.