As the financially stressful year is ending, and now you must have understood the importance of emergency funds when the firing round was at its peak. Your emergency funds must have helped you in surviving your necessities when you do not have a job.
If your parents are supporting you in the case of job loss in surviving necessities, your emergency funds must have helped in upskilling yourselves to dive deeper into the field, and in many ways.
In the next year, you must be looking forward to maintaining your emergency funds instead of sitting your money idle, but the prime objective has to be liquidity. Since you are not investing your emergency funds for the long term, liquidity of your fund must be a priority, you never know when unfortunate things come up.
Why diversification is needed in emergency funds?
Diversification is required to set off the risk of illiquidity at the time when you need your money most. Diversifying your money helps you optimise your financial security.
Let’s say you need an emergency fund of ₹1 lakhs, to make it liquified, you keep ₹30,000 in a savings bank account, invest ₹20,000 in liquid funds, ₹20,000 in recurring deposits, and ₹30,000 in fixed deposits. All these diversification will help you in redeeming money from the least rewarding investment if you need a part of your emergency funds.
Here are 3 best investment options in which you can invest your emergency funds to diversify the risk of illiquidity
A liquid fund is a type of debt mutual fund in which you invest your money in debt instruments whose maturity is less than 91 days. These instruments are highly credible and least affected by changing interest rates as they are short-term investments. You can get an interest rate of up to 4% to 5% which is much higher than conventional ways of investing.
It is an investment tool that provides you with flexibility in the amount of money you have to invest each month. For example, you can invest ₹1,000 in the current month and ₹500 in the following month. It also gives you a return of 4.5% to 7.5% with a minimum lock-in-period of 6 months.
Bank FDs are the most conventional, safest, and preferred option for investing your money for a short period of time. You can get an interest rate that may vary from 4% to 7.5%. You can invest your emergency funds and attract such FDs to your savings bank account through a sweep-in account facility. By using such a facility, your FD will get redeemed automatically in the case of not having the minimum balance required by your bank account.
All these investment options are recognised as the best way to invest your emergency funds and earn a decent interest rate or rate of return on your investments without compromising liquidity in 2023.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com