Where to keep a Rs 5 lakh emergency fund: savings account, FD or liquid fund

No one can say when a difficult phase will arrive in life. A sudden job loss, a hospital emergency or a big expense at home can come without warning. Getting through such situations without trouble requires money. This is why keeping an emergency fund ready is considered essential. The question is where exactly to keep it if you have savings of Rs 5 lakh.

Keeping part of the emergency fund in a savings account can be beneficial. Its biggest advantage is that money can be withdrawn easily when needed. If a hospital bill or an urgent payment has to be made, you do not have to wait to liquidate an investment. However, the interest rate on regular savings accounts can be relatively low. Keeping the entire amount in this account will therefore not give a good return.

For those who want a pre-fixed interest rate on their money, a bank fixed deposit (FD) can be useful. The interest rate varies with the bank and the deposit tenure. Even so, before putting money in an FD, one must check the conditions for premature withdrawal. Withdrawing before maturity can attract a penalty or fetch lower interest. Putting the entire emergency fund in a long-term FD is therefore not convenient.

Liquid mutual funds invest mainly in short-term debt and money market instruments. Withdrawals from them are relatively quick, though it can take time for the money to reach the bank account. Their returns are linked to the market and are not guaranteed. They should therefore not be considered a completely risk-free option.

According to Adhil Shetty, CEO of BankBazaar, an emergency fund of Rs 5 lakh can be divided into three parts. Rs 1 lakh can be kept in a savings account for immediate needs. Rs 2 lakh can be put in an FD to earn interest on fixed terms. The remaining Rs 2 lakh can be kept in a liquid mutual fund, with the facility to withdraw as needed.

This is only an example. The split need not be the same for everyone. The right proportion will depend on one's monthly expenses, job stability and ability to take risk.

The purpose of an emergency fund is not to increase profit but to provide financial support in difficult times. When choosing an investment option, therefore, give priority to availability of money, safety of principal and withdrawal conditions. Depending on one's needs, a savings account, an FD and a liquid fund can all be used in a balanced manner.