Life is full of unforeseen circumstances – good and bad and no one knows when you might face a rainy day! The prolonged lockdown due to the covid-19 pandemic has made us realize that our incomes can be drastically reduced due to unplanned external situations like home repairs. , family emergencies, unexpected travel or job loss. Hence, there is a need to create an emergency fund. The amount of money needed to build a proper emergency fund is certainly important in uncertain times and should be attempted in that manner. As you get closer to any other financial goal. An emergency fund can be as much as half of your previous year’s income. For example, if you have paid Rs. 6 lakhs in the last 1 year, so your emergency fund should be in the range of Rs 3 lakhs.

You can divide your emergency fund into 2 categories:

short term emergency fund

This is the fund you need for emergencies like home repairs, unexpected travel, health problems of family members etc. Such funds may remain in cash or savings account. Ideally 1 lakh out of 3 lakh can live in it. This is for immediate access, which in extreme cases can be sufficient until you have access to your long-term emergency fund.

long term emergency fund

This is for large scale emergencies like a major natural calamity like covid, job loss or medical emergency or even when you want to quit your job to take over the reins of an entrepreneurial venture. This fund should be invested in liquid funds or short term debt funds. Here you will earn a slightly higher rate of interest at 6% per annum than in a savings account and will take one working day to finish.

Let’s go one step further:

We all are familiar with SIP (Systematic Investment Plan) – here we invest a fixed amount every month and build a large corpus over time with the help of rupee cost averaging. But for professionals who have variable income, how can they commit a fixed amount every month?

Here is a simple solution-professionals can use STP instead of SIP. STP or Systematic Transfer Plans help in transferring a fixed amount every month from a fixed income/debt fund to an equity fund of the same fund house.

How does this work?

Let’s say you have shortlisted a mid-cap fund of a fund house to invest Rs 10,000 every month. Then choose the respective debt fund of the same fund house like Short Term Bond Fund and start transferring your surplus to this fund. Debt funds act like a reservoir to hold your funds. When the short-term fund reaches the fund value of Rs 30000, start STP of Rs 10000 for mid-cap fund. The STP will continue till such time the reservoir is not full. Keep transferring your surplus to short term funds and the predetermined STP process will continue to do the needful.

Short term funds generally have no entry or exit load and the transfer will be done on any given date of the month. One can also choose to transfer weekly. You get the best of both worlds; To park surplus funds in short term funds and earn 6% p.a. returns, transfer a fixed amount to equity funds from time to time and earn more than 12% p.a.

This STP concept can also be used extremely effectively by investors who do not want to lose their hard earned money. Simply invest your surplus in debt funds and transfer the appreciation to the respective equity funds. This facility is offered by all mutual funds. India. This way, one can invest in a safe debt fund and give 6% p.a. returns with almost no risk. This 6% p.a. when systematically transferred to an equity fund can earn 12% p.a. Starting from the base of Rs. 100, one can create a parallel equity corpus of Rs 100 from the appreciation of debt funds in 10 odd years and earn an average return of 8% per annum after tax.

In short, an emergency can strike anyone, anywhere, anytime. Hence, we never know when we might need a contingency fund. It is best to save money for future as well as for your emergencies. Remember, it’s not the money that matters. How you use it determines its true value!

Views are personal: The writer is Soumyajit Ghosh, Director – WealthApp Distributor

Disclaimer: The views expressed are those of the author and are personal. TAML may or may not subscribe to it. The views expressed in this article/video are in no way trying to predict the markets or their timing. The views expressed are for informational purposes only and do not imply any investment, legal or taxation advice. Any action taken by you based on the information contained herein is your sole responsibility and Tata Asset Management will not be liable in any way for such consequences. action taken by you

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