Need An Emergency Fund? Mutual Funds Can Help
- 2 min•
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- Updated 16 Oct 2023
What is mutual fundIt is an investment fund that collects money from many different investors. Professional fund managers use this money to buy securities and generate returns for investors.
How do you use mutual funds to create an emergency fund? Follow these steps:
Use Mutual Funds To Create Emergency Funds
1. Invest in liquid or ultra-short debt funds:
If an emergency strikes, you can draw out the money within a day. Besides, debt schemes ensure investment security.
Such funds are more liquid than bank deposits, where you might attract a penalty on premature withdrawal. They are also more tax-efficient when held for upwards of three years.
2. Invest a lump sum or via a systematic investment plan (SIP):
If you have the money to spare, invest a lump sum in your chosen mutual fund scheme. Otherwise, take the SIP route and make regular investments over a period of time.
Aim to build a corpus that covers your expenses for at least four to six months. Do not touch this money except in a crisis.
3. Make sure to reinvest the returns:
Mutual fund schemes come with the dividend option and the growth option. If you are saving the money for a rainy day, opt for the growth option.
This will reinvest your earnings from the scheme. Thus, you will benefit from the power of compounding interest.
Bottomline
Focus on liquidity rather than returns as you build your emergency fund. Risk-free returns and easy access to the money should be your top priorities.
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