Problems in life never come with a fixed date. If you suddenly lose your job, someone in the household gets ill or a big bill hits, the first thing a person looks at is their savings. In these troubled times only that money is really useful, which can be withdrawn immediately without any loss. Financial experts often say that the real purpose of an emergency fund is not to make huge profits. Its only function is to ensure that when you are in dire need of money, that money comes into your hands without any hindrance. Now the big question arises that where should this emergency fund be kept safely? Should it be invested in bank FDs, would it be better to invest in mutual funds or would it be better to invest in the stock market?
Having an emergency fund in the stock market is risky
Many people also invest emergency money in the stock market in the hope of higher returns, but experts consider this a very wrong move. Stock market movements are never uniform. Prices here go up and down rapidly every day. Suppose today you are in dire need of money for a medical emergency, and on the same day there is a sharp fall in the market. In such a situation, your deposit amount will be reduced significantly.
In helplessness, you have to sell your shares at a huge loss. The sharp fall in the market in recent times has made it clear how dangerous it can be to rely on stocks in times of need. Therefore, emergency savings should never be exposed to stock market fluctuations.
The same applies to equity mutual funds. Although in the long run, equity funds are expected to give higher returns than FDs or savings accounts, but they are also directly related to the stock market. When it suddenly comes time to withdraw your money, no one can guarantee what your funds will be worth.
Why Bank FD is the best option?
Bank FD is a safer route than shares and mutual funds. Especially short term FDs are considered best for emergency funds. The biggest advantage of this is that your principal remains fully protected and is not affected by market fluctuations.
Moreover, if you leave the entire money in a regular savings account, it earns very little interest. At the same time, by keeping it in a short-term FD, you get a little better interest than a savings account and can be withdrawn immediately if required. On one hand, your money remains safe and on the other hand, it is easily available at the time of need.
A perfect combination of savings account and small FD
However, experts also say that the entire amount of emergency fund should not be locked in a single long-term general FD. The most sensible approach is to split the fund into two.
A small portion of the funds should be kept in a savings account or with a sweep-in FD facility. With this, small sudden expenses can be met instantly, without the need to visit the bank or even break an FD. The remaining bulk of the fund can be kept in short term FDs. In this way, immediate availability of money is maintained and proper interest is also earned on the deposited capital.
Emergency fund is different from normal investment
One thing to keep in mind is that an emergency fund should never be treated like a normal investment portfolio. The purpose of both is completely different. An investment portfolio is designed to build wealth and earn higher returns in the future, while an emergency fund is only a shield to avoid sudden financial difficulties.
If we talk about priorities, the first choice for this fund should be Bank FD. After this, mutual funds fall far behind, that too only for amounts that are not required immediately. At the same time, stocks should be kept last in the emergency fund list. An emergency fund is the best, which can come in handy for you in times of need without any mental stress or financial loss.
