An emergency fund is essentially an amount of money that one keep aside for emergencies.

This fund can access at the hour of crisis or for unexpected and unplanned scenarios, and not for meeting your routine expenses. So, you must design it specifically to meet unexpected financial shortfalls that you may face from time to time.

Every investor should have an emergency fund, the amount of which could be equal to 3-6 months of his monthly expense and one of the many ways in which an investor can build this emergency fund is with the help of mutual funds.

Why do you need an emergency fund?

There may be many instances when there is an immediate need for money in life.

For example, a job loss, a car breakdown or an accident, a health or hospitalization issue with your close ones or urgent travel could mean you may need cash in a short notice.

To meet these uncertain needs, you either need to borrow money or have your own kitty kept aside. Most of the financial planners suggest building an emergency fund, which helps you take care of such uncertain situations.

It is for this reason that an emergency fund should have high liquidity and liquidity is the most critical feature that you should keep in mind when you are choosing where to stash your emergency fund.

You should be able to withdraw the money when you need it without any delay.

At the same time, you should ensure that you do not get penalized in the form of an exit load or pre-withdrawal penalty fee. The value of the amount invested should not go down either and must deliver guaranteed returns on the corpus.

How to build an emergency fund?

It is a very prudent idea to make an emergency fund one of your highest savings priorities.

To do this, in addition to mapping out your goals, chart your monthly income and expenses. Make sure to distinguish wants, such as movie tickets and dinner outing, from true expenses, such as rent or mortgage and utility bills.

As per the majority of the financial planners, the size of the emergency fund depends on your lifestyle, monthly costs, income, and dependents.

Where to stash your emergency fund?

The purpose of an emergency fund is to have your money immediately available in case of an unforeseen event.

Once you have accumulated the emergency fund, you should not leave it in cash or in the bank account, at least not entirely.

Even though an emergency fund should be liquid, it is not something you can access often.

Hence, invest it in a manner that you earn decent returns from it without compromising on liquidity. The ideal thing to do would be to spread the emergency fund across saving accounts, short-term RDs and debt mutual funds.

Savings accounts, money market accounts or certificates of deposits are common places to keep your emergency fund,

Savings account with high rate of interest is arguably the best option for an emergency fund. In your savings account search, look for an account with a higher than average interest rate and no monthly fees or balance requirements.

A general rule of thumb says it is wise to put away at least 3 to 6 months’ worth of expenses. For this using debt oriented mutual funds as the best way to build this emergency corpus.

Investors can build this slowly or over a period of time. They can use either the systematic investment plan (SIP) route or the lump-sum route. Cash received through windfall gains can be used to create this corpus.

Investments can be made in liquid funds or ultra short-term debt oriented mutual funds. These funds enjoy easy liquidity and investors can earn more than they earn in a savings bank account.

In case of an emergency or when one needs money, investors can redeem within 1-2 working days.

Best debt oriented mutual fund for an emergency fund

Here is the list of top 5 debt oriented mutual fund which you can invest for an emergency fund.

1. Reliance Liquid Fund Direct-Growth

Right now, Reliance Liquid Fund is one of the most popular liquid funds in the market and its objective is to provide steady returns with fair risk and high liquidity. It is one of the best liquid funds of 2019.

Here is the essential information of this fund:

Launch date 01 January 2013
NAV (6 Sep 2018) Rs. 4,701.4676
Type of scheme Direct
Rating by Groww 5 stars
AUM (Fund Size) Rs. 26,747
Riskometer very less
Minimum SIP (SIP) Rs. 100
Minimum SWP Rs. 500
Performance against benchmark Has consistently performed better than its benchmark CRISIL liquid from the beginning.
Age of fund 5 years old
Expense ratio 0.20%
Exit load Zero
type Open-ended

Every year returns of this fund in the last few years:

Period Returns
1 year 7.50%
3 year 7.20%
5 years 7.70%
From launch 8.10%

2. Franklin India Liquid Fund Direct-Growth

Another popular liquid fund in the market and its objective is to provide steady returns with fair risk and high liquidity. This fund has 85.62% investment in Debt of which, 85.66% in funds invested in very low-risk securities.

It is suitable for the investors who want to invest for very short term and are looking for an alternative to bank accounts/deposits.

Here is the essential information of this fund:

Launch date 01 January 2013
NAV (6 Sep 2018) Rs. 2,884.14
Type of scheme Direct
Rating by Groww 5 stars
AUM (Fund Size) Rs. 11,849
Riskometer Low
Minimum SIP (SIP) NA
Minimum SWP Rs. 500
Performance against benchmark Has consistently performed better than its benchmark CRISIL liquid from the beginning.
Age of fund 5 years old
Expense ratio 0.11%
Exit load Zero
type Open-ended

Every year returns of this fund in the last few years:

Period Returns
1 year 7.60%
3 year 7.20%
5 years 7.70%
From launch 8.10%

3. Aditya Birla Sun Life Liquid Fund Direct-Growth

This Liquid Fund seeks to deliver good returns with less risk and higher liquidity from a portfolio of money markets and high-quality debt (debt) securities.

Here is the essential information of this fund:

Launch date 22 December 2012
NAV (6 Sep 2018) Rs. 2,884.14
Type of scheme Direct
Rating by Groww 4 stars
AUM (Fund Size) Rs. 61,650
Riskometer Low
Minimum SIP (SIP) NA
Minimum SWP Rs. 500
Performance against benchmark Has consistently performed better than its benchmark CRISIL liquid from the beginning.
Age of fund 5 years old
Expense ratio 0.19%
Exit load Zero
type Open-ended

Every year returns of this fund in the last few years:

Period Returns
1 year 7.47%
3 year 7.16%
5 years 7.68%
From launch 8.10%

4. Franklin India Ultra Short Bond Fund Super Institutional Direct

This is one of the best ultra-short bond funds out there in the market and it seeks to deliver good returns with less risk and higher liquidity from a portfolio of money markets and high-quality debt (debt) securities.

Here is the essential information of this fund:

Launch date 01 January 2013
NAV (6 Sep 2018) Rs. 27.44
Type of scheme Direct
Rating by Groww 5 stars
AUM (Fund Size) Rs. 19,954
Riskometer Low
Minimum SIP (SIP) NA
Minimum SWP Rs. 500
Performance against benchmark Has consistently performed better than its benchmark CRISIL liquid from the beginning.
Age of fund 5 years old
Expense ratio 0.42%
Exit load Zero
type Open-ended

Every year returns of this fund in the last few years:

Period Returns
1 year 9.95%
3 year 8.93%
5 years 9.30%
From launch 9.50%

5. ICICI Prudential Ultra Short Term Fund Direct-Growth

This scheme seeks to generate regular income through investments in fixed income securities so as to make regular dividend distribution to unitholders seeking the Dividend Option.

The secondary objective of the Scheme is to generate long-term capital appreciation by investing a portion of the assets in equity and equity-related instruments.

Here is the essential information of this fund:

Launch date 01 January 2013
NAV (6 Sep 2018) Rs. 20.56
Type of scheme Direct
Rating by Groww 5 stars
AUM (Fund Size) Rs. 5,106
Riskometer Low
Minimum SIP (SIP) Rs. 1000
Minimum SWP Rs. 1000
Performance against benchmark Has consistently performed better than its benchmark CRISIL liquid from the beginning.
Age of fund 5 years old
Expense ratio 0.40%
Exit load Zero
type Open-ended

Every year returns of this fund in the last few years:

Period Returns
1 year 9.95%
3 year 8.93%
5 years 9.30%
From launch 9.50%

The Bottom Line

Rather than keeping your money idle in a savings account where you earn merely 3.5% paid by banks, investments in liquid and ultra short-term mutual funds, tend to offer you higher returns.

On an average, over the last one year, the liquid funds’ category has given an average return of 7%, while the ultra-short-term funds category has given 8% returns.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww