Emergency Fund

We conducted a poll on Emergency Funds back when we all thought the pandemic will end before the year but lol, here we are!

Anyway, We all learnt our lesson of The importance of saving for the Rainy Day
So folks, where do you stash your emergency fund?

I prefer to stash it as FD and use the Auto Fixed Deposit facility of Axis. So it stays out of my sight and regular spending. It’s better that way since I don’t want to spend it inadvertently. And no need to keep track of the spending.

I also use FD to park my emergency money. I have FDs with different banks. I have two 50k, one 1lakh FD. Rest of them are 2 Lakhs FD. I have structured my FDs in this way so that I can take the funds out in increments of 50k as needed. It minimizes the impact of early withdrawal.

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Savings/sweep accounts. Need it to be available instantly in case of emergencies.

I was doing that with multiple FD’s worth 10k, I should do it like you :slight_smile:

Liquid funds, FDs and a bit in the savings account.

Emergency typically translates to “I need the money in the next 30 minutes to within a few hours”. FDs don’t have that kind of liquidity. So I depend on liquid funds first. If it’s an emergency which has recurring expenses over the next few days, then I have some time to break the FDs if needed, by keeping the liquid funds as the first preference.

A better alternative to liquid funds is ultra short-term funds (in the short term).

For investors in the 20% and 30% tax bracket, ultra short-term funds offer a tax advantage. Go for the dividend reinvestment plan as the dividend distribution tax for retail investors is 13.519%. This works lower than the short-term income tax rates of 20.6% and 30.9% that you’d have had to pay in a liquid fund as short-term capital gains tax if you withdrew within a year of investing.

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Hi Sanya and @Raghav What I’ve been doing personally is still stick to liquid funds and reduce tax implication by having multiple of them at staggering dates such that one at least is available (with long term capital gains instead of short terms >3yrs).
Eg: 1 completing 3 yrs worth 1 lakh, other 1 lkah completing 3 yrs after 6 months/ QTR and so on.

And emergency for me would largely mean more than 45 days at any moment as for shorter terms emergencies have sufficient credit on a credit card

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Hey @Yuvi
What is a sweep account? I don’t fully grasp it!

@AshishBhalla

Most banks have a ‘sweep facility’. When it is enabled and your balance crosses a threshold, it’ll put the money into something like an FD. The interest rates will be lower than actual FD but higher than savings account. No lock-in period or penalty either.

Assume threshold of 10k and after depositing some money, your balance went up to 12k. The bank will create a sweep deposit of 10k and the main balance will show as 2k. However, total account balance is still 12k. If you go to an ATM or a branch, you can still withdraw 12k. When you try to withdraw, the bank will look at the main balance first and if that’s not sufficient, it’ll apply interest to how many ever days has passed since the sweep deposit was created and then break off that sweep deposit.

Also, if your bank requires to have a minimum balance of 5k, the sweep balance will count towards it. So, if the main balance is 2k and sweep deposit is 10k, your total balance is 12k and so won’t incur any minimum balance penalty.

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