In today’s world of shifting economic constraints, having adequate funds to rely on during an emergency is critical. Unforeseen circumstances can occur at any time; it can be some essential repairs of the house, a sudden medical crisis, or a lay-off.
Earlier for emergency savings the current deposit accounts were the most favored, however, with changing times many investors are looking for better options with higher returns and better accessibility. One such choice is the liquid funds through which the investor can get their funds more easily and the returns are also higher.
In this blog, we will explore why liquid funds are a smart choice for emergency savings.
What are Liquid Funds
Liquid funds are a type of mutual fund that invests mostly in short-term debt instruments. They are designed to provide investors with high liquidity, allowing them to access their money quickly, usually within 24 hours.
Compared to equities, they are less volatile and offer better returns than standard savings accounts; which makes them an attractive option for investors looking to invest their emergency savings. For example, Nippon India Mutual Funds is a popular liquid mutual fund among investors.
The Benefits Offered by Liquid Funds
Liquid Funds offer several benefits. Some of them are discussed below:
High Liquidity
One of the primary advantages of liquid funds is their high liquidity. Unlike fixed deposits that have lock-in periods, liquid funds allow investors to withdraw their money whenever they need it without penalties. This makes them appropriate for emergency savings, where immediate access to cash is needed.
Competitive Returns
In comparison to traditional savings accounts, liquid funds offer much higher potential returns. While savings accounts might yield around 3-4% annually, liquid funds can provide returns in the range of 6-7% or more, depending on market conditions. This difference in returns could have a huge effect on the growth of emergency savings over time.
Minimal Risk
All investments imply risk and liquid funds are considered low risk compared to equity and long-term debt instruments. The underlying assets of liquid funds are short-term and usually have lower credit risk, therefore liquid funds are a safer bet to preserve emergency savings.
Comparing Liquid Funds with Other Options
Let’s compare liquid funds with other common savings instruments to understand why they are among the best options for emergency savings.
Savings Accounts
While they offer safety and liquidity, savings account interest rates are relatively low. Even real returns from a savings account can be negative during inflation.
Fixed Deposits (FDs)
FDs provide guaranteed returns, but they come with lock-in periods and to process early withdrawal investors often have to incur penalties to access their funds, making them less ideal for emergencies.
Debt Funds
Debt funds invest across the various instruments in the debt market which leads to certain risks, while liquid funds only invest across the short-term instruments. While debt funds may offer better returns, the potential for loss in value makes them less suitable for emergency savings.
Conclusion
Liquid funds present a compelling option for investors looking to create or enhance their emergency savings. Their combination of high liquidity, better returns, and minimal risk makes them an intelligent alternative to traditional savings accounts and fixed deposits.
By setting aside a portion of their income in a liquid fund, investors can create a safety net to protect themselves from unexpected financial shocks. Remember, the key to effective emergency savings is not just about saving but saving smartly. With liquid funds, investors can do both.
