Before asking where you should invest your emergency funds, the priority question should be whether you should invest it or not. Well, the answer is only in an avenue that is highly liquid in nature. One of the funds which is a highly liquid financial instrument is overnight funds in which you can invest your emergency funds.
What is an emergency fund?
Emergency funds are the funds that you keep aside only for the purpose of meeting your financial requirements in emergencies. The corpus amount should be equal to at least 6 months of your expenses.
What are overnight funds?
As the name suggests, overnight funds are a type of debt fund that matures the next day. You hold your debt instrument only for a night, it will mature the very next day. Your fund manager needs to invest in other overnight funds and the series will go on.
Why is it suitable for investing your emergency funds?
You cannot afford any type of risk in the case of an emergency fund. Ideally, it is advisable not to expect anything from your emergency funds as they are supposed to be kept idle to solve the liquidity problem. Here are 3 main reasons why overnight funds can be the best option for you even if you want to invest your emergency money.
Overnight mutual funds are said to be the safest kind of mutual fund in the industry, however, no investment provides you with 100% of safety. But, the riskiest aspect of debt funds, interest rate risk, gets reduced in the case of overnight funds as they mature every day. You get to invest your money in current prevailing interest rates.
High rate of return
You can earn a 3% to 5% annualised rate of return which is much better than the FD if you are looking forward to investing your emergency funds in the FD. Instead of keeping your money idle in your savings bank account or fixing it as a deposit, you can make it liquid as your savings bank account while earning from the same. Return on your investment might be a criterion of where you should keep your emergency funds.
Apart from being highly liquid in nature, overnight funds are affordable to manage. Fund manager just charges up to 1% of the expense ratio to manage your savings. Otherwise, actively managed funds are highly expensive to afford. But in the case of overnight funds, you have to pay as passively managed funds.
Investing in your emergency fund is all your choice, as it needs to be highly liquid, which means have the access to your money whenever you need it. You can redeem the units of your overnight funds during trading hours. It does not have any credit risk, or a probability of losing your money while staying invested in a debt, which makes it more liquid as there is a chance of losing your money in the case of overnight funds.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com