Support financial plan with emergency corpus

India has been recognised as a nation of savers. Indians are known to be conservative in their expenditure and nearly 83% of Indian households manage to save for a variety of life goals. Children’s education, social ceremonies, buying a house and consumer durables, expanding business operations, and pilgrimage are some of the top goals of Indian savers. Despite having such a strong savings culture, the Indian population is still financially vulnerable.

One of the first steps to a secure financial future is to assess your risk-return requirements and then judiciously allocate your assets among investable opportunities that are capable of meeting your needs. Once the goals and risk profile is determined, the asset allocation process becomes far more effective. This is basically goals based investing and is considered one of the best ways to allocate assets.

However, life can be tricky and often throw our way hurdles and opportunities that have been unaccounted for. While most expenses can be planned for, certain eventualities in life can often leave you without a steady income or in need of unexpectedly large funds. In order to ensure that these events do not maim you, it is imperative that you consider setting up an emergency fund, which you can turn towards in times of abject need. A significant advantage of having an emergency is that it allows you to handle unexpected financial needs without taking on more debt.

Building an emergency fund is one of the primary steps that can be taken to reduce the financial vulnerability of a household. An emergency fund can help cope with unforeseen or unfortunate events such as critical illnesses and permanent loss of income by reducing financial stress that comes with them.

Financial planners generally suggest having enough emergency corpus to sustain expenses for about year. These expenses should account for monthly household expenditure, school/college fees, outstanding loan and insurance installments etc. Bank deposits and keeping cash at home are the two most preferred modes of saving for Indian households. It is recommended that an investor can keep up to a month’s expenses in savings account. The rest can be invested in liquid or short-term mutual funds. These funds can offer potentially better returns than idle cash, at relatively lower levels of risk. They can also be liquidated within a span of two to seven working days. There are several other avenues of investment and it would be prudent to consult a financial advisor before making investments to build an emergency corpus.

HAVE PLAN B

• An emergency fund makes you financially strong and helps cope with events that are unforeseen
   
• While Indians prefer bank deposits and ready cash, they often choose short-term mutual funds

The writer is senior fund manager – equities, BNP Paribas Mutual Fund