Some mutual fund basics
Mutual funds are subcategorized based on various attributes like investment strategy, fund size, asset allocation, risk profile, etc. These are professionally managed funds which collect money from investors sharing a common investment objective and invest this pool of funds in across various sectors in assets like equity, debt, corporate bonds, government securities, call money, etc. Mutual funds are listed funds which are traded at the exchange, and it is the responsibility of the fund manager to buy / sell securities in accordance with the fund’s investment objective.
Mutual funds can be a good way for investors to liquidate their investment portfolio. You never know when you will be in dire need to cash and in such vulnerable moments having assets which you can liquidate easily is essential.
So if you are new to the world of investing and wondering how to build a commendable emergency fund, here are few steps to build an emergency fund using mutual funds:
- Have a defined financial goal
The first step towards successful financial planning is to have a realistic goal, and the same applies when it comes to emergency fund planning. What one needs to do is take the current average medical cost and keeping inflation in mind, arrive at a figure and set it as their goal. This way, you might also get a clear idea on how and where to spread your investments in order to get closer to their emergency fund amount.
- Invest only within your boundaries
Although mutual funds can be one of the ways for building a decent emergency fund, remember that these funds aren’t obligated to provide investors with fixed returns. Mutual funds like equity funds invest predominantly in equity related instruments, making them a high risk investment. So only investors having some risk tolerance should consider investing in mutual funds. In case of risk averse investors, you can consider other options for building an emergency fund. So make sure you understand your risk appetite before investing in any scheme for building an emergency fund.
- Start investing in mutual funds via SIP
Mutual funds have two investment options for investors – lumpsum and SIP. If you have surplus capital parked which you wish to put to better use, you can invest in mutual funds via lumpsum payment. In lumpsum, you pay at the beginning of the investment cycle and are allotted more number of units based on the fund’s existing NAV. But if you pay via SIP, you will be inculcating the habit of saving regularly. This disciplinary approach towards investing is essential for building a decent emergency fund. SIP offers regular and systematic investing, which is done electronically at the comfort of one’s smartphone or laptop. Also, SIP investments stand a chance of benefiting from compounding. Hence if you want to be successful with building a decent emergency fund, you need to start investing in mutual funds through SIP.
- Limit your monthly expenditures to a minimum
Some expenses like utility bills, groceries, daily travel, etc. are going to be recurring which one cannot control. But as responsible individuals, it is up to us to limit our other expenses like spending on restaurant meals, watching movies in multiplexes, travelling using a personal vehicle, etc. which are unnecessary and can be curbed. Instead, one can opt using public transport for travelling to work, eat home cooked meals instead of eating outside and if possible watch films in single screen theatres where the prices are comparatively low. If one takes these small but vital measures and saves enough, this can aid them in building a decent emergency fund.
- Invest a certain amount in liquid funds
Liquid funds are those mutual funds that invest in fixed income securities that have a maturity of up to 91 days. Liquid funds come in handy when one has to liquidate their assets during emergencies. These are a debt fund category which is preferred by several investors for their sheer quality of providing instant redemption. Hence, liquid funds can be of one the several investment tools an investor invests in for building an emergency fund.
We hope that the above steps ease out your emergency fund building process. Remember that emergency fund should be treated as a priority and you soon start building one using mutual funds.