Getting prepared for the future contingencies with mutual funds

by Finway FSC Empowering People Financially

We don’t have a crystal ball to peep into the future nor are we blessed enough to predict the future rightly. So in this world full of unexpected shocks and surprises, it’s imperative to keep aside some funds to tame down the circumstances that might happen outside our planned strategies and or expectations. It is similar to the way ants get into collecting extra food for the rainy days well in advance to ensure that they are able to adequately fill their appetite even when they may not be able to step out to fetch food.

Alternatively referred to as ‘contingency funds’, emergency funds are the money which we save to prevent our goal-based planning from getting derailed or defaulted due to the sudden turn of events. It works towards ensuring that in case of sudden and urgent needs you don’t need to borrow money from family and closed ones or take a personal loan from any of the financial institutions or trusted lending institutions. But remember to utilize these funds strictly for the needs that bring in the disasters on a sudden note; not for the expense overruns or when the budgeting has gone haywire. It could be sudden job-loss or getting stuck with some serious illness or accident.

The utility of money that we earn in our lives goes by two main features, i.e., liquidity and returns. To bring in some great benefits from the money earned one has to keep the key features ahead of the two robbers of money (inflation and taxes). Regarding contingency funds, the priority is laid more on liquidity while the returns can wait. Even with that, the aim is to get least risk-free returns on this money.

It’s advised to keep the emergency funds in liquid or ultra-short debt funds in order to get funds in the case of need within a quick timeline. While, on the other hand investing emergency funds in fixed deposits might cut down the returns (if broken prematurely). Also, it may be tax inefficient if and when the need for an emergency loan from the mutual funds does not emerge till three years. This is because long term capital gains on debt mutual funds do not cover the fixed deposits in its scanner. Investing good lump sum amounts in liquid or ultra-short MFs or SIPs are the core of financial planning, which further prepares one for the responsibilities ahead. Collecting up emergency funds help to find a good ride to overcome the unpredicted bumps faced in your financial journey.