Sailing Through Turbulent Times

Emergencies are an acid test in one’s life. A few years ago, in a tiny hamlet of Darjeeling, a small oil lamp became the cause of a major catastrophy, burning down a portion of the market. The wooden shops and houses stood vulnerable to the flames that engulfed one after another. The residents and shop owners, in a matter of few hours, were left in the lurch, fighting for life. All their valuables and cash were gutted in the inferno.

Words fall inadequate to express the emotion facing such turbulent times. If we think of it with a larger horizon in mind, being prepared for such “unforeseen” is a must — think ahead and plan ahead.

Being financially safe is a wise step to stay prepared. An emergency fund is parked for immediate requirement to cover expenses that tails along during dire needs. While there are various insurance plans to cover expenses during emergencies, which are not limited to just medical emergencies or car damages but sudden calamities, it takes a few days to reach to your rescue.

Yadvendra Tyagi, Co-founder, EnKash, is survived with four members in his family. He claims to be saving close to 15 per cent of his monthly income as emergency funds. Tyagi recalls to have utilised some of the funds in medical emergencies when mediclaims took some time to get through, and there were days when his parents needed some money. “Quite a few of those unplanned expenses have gone across as emergency funds,” he says.

Tyagi has been investing in insurance, mutual funds, and then SIP became a major part of his emergency savings. “Over a period of time I realised that investing in SIP or Mutual Funds (MFs) is fairly a good deal because even if you ask for redemption today or tomorrow morning the money comes into your account. I found it much better than Fixed Deposits (FDs) from the returns point of view and liquidity point of view,” he says.

The reserves set aside as emergency funds is often used interchangeably with liquid assets that can be immediately used to convert into cash-in-hand. Lalit Mehta, Co-founder, Decimal Technologies, has been setting aside some reserves as savings. “Though I never thought of it as an emergency fund, some of the reserves have helped me cover expenses during medical needs. Now as medical expenses are going up, we have been saving something, which I think  it is pretty much an emergency fund.”

Liquidity is the key to tackle emergency-like situations, as it needs to be dealt immediately and cash-in-hand plays a crucial role. On the other hand, the days of saving money at home is also becoming irrelevant, as everything is accessible in a digital format. Although we do keep some cash at home, but keeping loads of it comes with a risk of theft and there  are no returns at all.

So, this raises a question of favourable investment instruments to save money for emergencies. Mehta says, “You should put your money for emergencies in the investment instrument where the risk is very low and liquidity is very high. I think FDs are one such investment instrument, which kind of does both. Funds parked in FDs would be more usable as emergency funds, whereas funds in the equities side have chances  of high risk.”

Harsh Jain, Co-founder and Chief Operating Officer, Groww, adds, “Although stocks are also a form of liquid asset but you do not want to invest your money in it because there is a lot of volatility similar to equity MFs. Debt bonds also do not have liquidity, so you can have FDs or Recurring Deposits (RDs), as you would not mind losing a few percentages in returns during times of emergencies.”

For Amit More, Founder and CEO, Finzy, another important aspect to consider is impact cost of liquidity and lock-in clauses of your investment instruments. While FDs and RDs might have exit penalty, MF schemes might have exit loads, Gold would have bid or ask spread, and land or real asset can have serious liquidity discounts.

He says, “Liquidity of an asset is a very important criteria for any investment and accordingly it is virtuous to understand the time taken for each asset class to be ready. Also, emergencies are completely agnostic to weekends, public holidays and weekdays. So, you also need to take this into account.”

Are You Ready For An Emergency?

Work is a blessing. An individual should start saving as soon as they start earning. Ideally, depending upon an individual’s lifestyle, it is prudent to save at least two to three months of spends as emergency funds, which is important when you are devoid of any income.

Then it raises a question as to what percentage of income should an individual allocate for emergencies? According to Mehta, instead of pegging it to a percentage of income, an individual can rather peg it to the kind of emergency he or she foresees.

“I would peg it to inflation-linked absolute money, because for an emergency, you really do not want to save 10 per cent of your salary every month, and not make the best of the returns, and keep it as liquid funds. You would want to keep a certain corpus linked to your current standard of living and also link it to inflation by continuing to add five per cent or six per cent every year, depending on inflation,” Mehta says.

Here are the three major buckets one should follow to measure savings, says Tyagi:

- Firstly, an individual should  always have a separate fund for medical emergency

- Secondly, a separate fund to cover the lean period in life, which may happen in 18 months, 20 months or in 10 years of your life

- Third is the goal-oriented savings, which might not fall as emergency funds, but this might help you out in case any third-sort of emergency takes place

Coming to the quantum of emergency funds, More says, it differs from individual to individual, their lifestyles, and their living standards.

Here is the mode and quantum of liquid funds that one must have access to in order to feel monetarily secure about unplanned situations.

dipendra@outlookindia.com