Why is it important to have an emergency fund?

As financial inclusion is happening at a must faster pace than a decade ago, financial planning is very important to secure the future. We often ignore the importance of emergency funds while preparing the investment plan. If an adequate emergency corpus is not built then any unforeseen crisis may affect your other investments that are planned to use in other purposes.

In some cases, the investors may have to take a big cut if they withdraw money prematurely. Long-term investments are meant for securing future, therefore, the investors must keep some amount to tide over the emergency. This fund is not meant for meeting your routine expenses.  So, you must design it specifically to meet unexpected financial shortfalls that may come. 

Jitendra Solanki, a SEBI-registered investment expert, told Zee Business Online, "Emergency funds should be kept aside so that your regular investments are not affected. Every individual has different needs and their circumstances also vary, therefore, personalised planning is important. One has to take a call according to their social status, income, and expenses. However, one should keep an amount equal to six months income or salary as a contingency fund, as per the standard rule."

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"The best investment for this purpose is liquid or debt mutual funds, which are liquid and have generally better return potential after tax. In case, the fund is not used in three years period then it comes under a long-term plan, which attracts 20 per cent tax on interest income.

Whereas the funds of less than three years duration have to pay 30 per cent tax on interest income. The tax rate is the same for the fixed deposit interest income. Therefore, liquid mutual funds have better earning and tax saving potential than fixed deposits."

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Balwant Jain, a Mumbai-based tax and investment expert, said that ideally one should save at least six months expense, including EMIs and monthly savings outgoes, as an emergency fund. A liquid mutual fund is the best option for building emergency funds. Liquid mutual funds can be even held beyond time if the investor does not face any emergency over the period. "These funds sometimes give much higher returns. On the other hand, FDs and recurring deposit accounts can't beat the inflation."