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Building a Contingency Fund

The objective of a contingency fund is to have liquidity to meet emergencies & not the returns that it earns…

I have Rs 5 lakh in my bank savings account, which I want to retain as contingency fund. Where can I park this sum so that it fetches better returns in comparison to the savings bank returns, with high liquidity?
- Ajay Patel

A contingency plan is all about sound budgeting for emergencies and the unexpected, wherein a contingency fund is created and kept in reserve for use in times of emergencies when other financial reserves cannot be accessed instantly. If you have small children at home, you should consider having Rs 10,000 cash in your locker. This sum will change when your wife is expecting to say Rs 1 and can go up to Rs 2-3 lakh if you have dependent parents with health conditions that can result in immediate hospitalisation.

The objective of the contingency fund is to have liquidity to meet the emergency and not the returns that it earns, hence this sum should be kept in an instrument which is highly liquid such as a savings bank account, cash in a locker at home or liquid funds. You have indicated Rs 5 lakh as contingency fund, which seems to be high and the choice of an instrument to park this sum will depend on the type of emergency and the liquidity that you foresee for this fund. If this sum is for something that you definitely do not foresee to occur over the next six months or more; you can consider matching the investment for an equivalent tenure fixed maturity plan (FMP) by selecting a plan from our website or consider parking the money in a liquid fund.

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