How Much Cash Should You Keep When Markets Turn Volatile?

When markets turn volatile, it is natural for investors to wonder whether they should keep more money in cash. Rising household expenses can make that temptation even stronger. But the amount of emergency money you need should depend more on your expenses, income and financial responsibilities than on what the markets are doing at a given point in time.

“Investors should remember that cash in hand and market movement should not have any correlation. When investors enter equity, there is already an acceptance that the market will go through periods of volatility and downside, as that is the nature of equity,” says Subhendu Harichandan, executive director, Anand Rathi Wealth Limited.

Hence, “the investors' portfolio should be planned keeping this thought in mind and not tweak the allocation every time markets turn uncertain,” he adds.

The more important question is how much liquidity an investor actually needs, and this should be determined separately from the market environment. A retired investor will need a different level of liquidity because there may not be a regular income coming in, while a salaried individual has the benefit of a monthly income. Therefore, the requirement can be assessed based on essential expenses and the stability of that income.

The basic range for investors is to park aside around 6–8 months of essential expenses as their emergency fund, which should cover expenses that cannot easily be stopped or reduced, such as rent or home-loan EMIs, groceries, utilities, insurance and basic medical costs.

“If there are any predictable annual expenses like school fees or insurance premiums, ensure to include them as well in the calculations. For example, if an investor has essential monthly expenses of Rs 60,000, a 6–8 month emergency fund would be around Rs 3.6–4.8 lakh,” says Harichandan.

One important thing for investors to note is that this emergency fund is different from the long-term investment portfolio. The main purpose of the emergency fund is to deal with unexpected situations such as a job loss, unexpected medical expenses, or a temporary interruption in income, so that investors do not have to dip into their long-term investments when they suddenly need money.

“At the portfolio level, investors need to structure their portfolio so they can weather all phases of the market cycle comfortably. A suitable equity-debt allocation can provide the growth potential from equity while the debt portion acts as a buffer for shorter term requirements during market uncertainty which many investors are often concerned about. This means market volatility is already accounted for within the long-term portfolio, rather than requiring investors to repeatedly move money into cash out of panic,” says Harichandan.

At the same time, investors should not fear volatility and keep excessive amount of money idle simply because they are seeing short-term market movements which is making them uncomfortable. Markets ups and downs are a normal part of investing, and too much cash can reduce the long-term potential for building wealth.

Thus, the emergency fund should prioritise safety and liquidity over returns, with a portion kept in a savings account for immediate needs, and a larger amount in liquid or short-term debt instruments. The objective is to have enough money available for a genuine emergency without allowing short term market uncertainty to disrupt the long-term investment plan.