You know, in today’s world, it often feels like everything can be solved with money that we don’t have. This is why having a large emergency fund will provide us with financial security. Whether that is due to a health shock, a car breaking down or untimely home costs — an emergency fund can be the difference. Liquid funds are also ideal when it comes to maintaining an emergency fund. In this article, we are going to see the proper and smart way in which we can use Liquid funds of mutual funds so that our Financial Safety is changed.

Well, let’s get things rolling by knowing what an emergency fund stands for!

What is an emergency fund?

The emergency fund is the safety net to protect against financial shocks since it provides a buffer should you need to incur costs that were not planned for such as medical bills, car repairs or loss of job. A general rule of thumb is to keep 3-6 months’ worth or more, depending on your financial situation within a readily accessible account such as a savings account/money market fund. This pool works as a safety net and offers financial planning and peace of mind during turbulent times.

Why Liquid Funds are Ideal for Emergency Funds?

Liquid funds as emergency funds: – Liquid funds is the best option for keeping your cash and it will come in handy whenever you need it urgently because of its high liquidity. Unlike what you may opt for in traditional investment options, liquid funds enable faster and easier redemption – serving as an apt solution to preserving emergency funds. Also, liquid funds generally offer better returns than savings accounts; yet maintaining a low level of risk. Combining accessibility and possible growth, liquid funds seem like a good choice for someone who wants to keep an emergency fund.

What are liquid funds?

Liquid Funds are mutual funds that invest in short-term money market instruments like treasury bills, commercial paper and certificates of deposits. Investors like funds for their substantial liquidity – you can buy or sell these funds at any time with no real consequences. These funds have residual maturities of up to 91 days to generate ideal returns while maintaining safety and high liquidity. Being short-term in nature and highly liquid, Liquid Funds are very handy for parking your emergency funds as they can be redeemed instantly for ready cash. Additionally, liquid funds are also known to return more than your standard savings account and still remain a low-involved risk alternative. Liquid funds are preferred by investors to park their money for short periods of time typically 1 day to 3 months

Key features of liquid funds

Some of the key characteristics that liquid funds exhibit are:

1. Liquid funds can be redeemed almost instantaneously thereby easily liquidating to meet emergency fund requirements.

2. These kinds of funds predominantly invest in short-term money market instruments, and therefore even though the returns are low but they maintain a digestive level of risk.

3. High Returns: They provide better returns than traditional savings accounts, hence best suited for keeping emergency funds.

4. Stability a way, liquid funds are like an extension of saving accounts but with the added feature that your money grows over time.

Risk and return profile of liquid funds

Liquid funds come under low-risk to moderate return bracket. They invest in money market securities with short term maturities, enabling their returns to keep a level of stability that is relatively higher compared to others. Liquid funds offer better returns than savings accounts, and that is one reason they attract people for using it to park emergency corpus.

But liquid funds, which mainly target stability in returns are not completely risk-free. However, as with anything else on the market there are always small variations in value that can come from changes to interest rates or performance of underlying money-market instruments.

To sum up, liquid funds provide the perfect blend of liquidity as well as stability and slightly better returns over regular savings accounts that make them so apt to park your emergency corpus.

Benefits of Using Liquid Funds for Emergency Fund Management

Using liquid funds for emergency fund management has more than just one benefit which is:-

1. Sufficient liquidity is maintained: As money market instruments the liquid funds can easily and abruptly translate to cash, thus they are best as an emergency fund.

2. High-quality returns: liquid funds usually tend to provide this Return on Investment that balances the growth of an emergency fund over time more than personnel savings.

3. Better returns with lower risk: Liquid funds offer better than the saving account interest rates but at a relatively low level of risk which makes it suitable to park your emergency fund.

4. Short Maturity Period: Liquid funds do not have a lock-in period as such, instead they do have a short maturity of about 91 days so investors can redeem the fund once these funds are matured.

5. Stability: Liquid funds offer a little better return than regular savings accounts; it makes the liquid fund a go-to place in case of emergency and you want to park your money.

In short, the high liquidity to get money instantly; better returns when compared with a savings account or current as a bank account or post office saving schemes and the low-risk profile of these funds overall says that Liquid Fund is one good option for your purpose of maintaining an emergency fund.

Steps to Use Liquid Funds for Emergency Fund Management

1. Shortlist Liquid Funds: Choose liquid funds from reputed fund houses and track record of strong performance as well as low expense ratios. Before making this decision, evaluate the fund’s historical returns compared with its expense ratio and portfolio quality.

2. Opening an account:  you will need to have a demat account or account with a recognised AMC. which often includes submitting KYC docs and filling up some paperwork.

3. Invest: Load the account in a liquid fund of your choice. You can go about doing this either through lump-sum investments or through SIP way of regular investment.

4. Create Emergency Redemption: have a plan to liquidate your funds in case of emergency. Know the redemption process — is it online or can you use daily ad hoc debit card transactions, any restrictions like frequency of redemptions/amount etc

5. Keep a check: keep a check on your liquid monitor the performance of the funds from time to time and review its portfolio once in 3 or 6 months. Keep an eye on your financial condition and fund performance to make required adjustments.

However, keep in mind that liquid funds provide high liquidity and relatively lower risk; hence do not forget to evaluate your financial situation along with the risk-taking capability before you invest in any kind of official product.

On a parting note…

Using liquid funds for emergencies is beneficial for high liquidity and almost as good returns with much lesser risk involved, no worries about a lock-in period to penalize you & stability. Liquid funds are a good alternative to keep your emergency fund due to their feature of high accessibility, offer competitive returns and are relatively less risky. Given the nature of this emergency fund strategy, choosing consistent and low-cost liquid funds with options to invest in trustworthy schemes enables one to literally churn out money from them while managing this surplus cash.

We hope this article helps you!

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Disclaimer – This article is for educational purposes only and does not intend to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme-related document carefully before investing.