Build your safety net with the right funds

Summary: Emergencies rarely come with a warning. That’s why building a safety net is essential. Here’s a look at where and how you can park your money to create a reliable emergency fund.

Which debt funds are most suitable for building an emergency fund? – Anonymous

Emergencies rarely announce themselves. A layoff, a medical expense or an urgent repair can arise when you least expect it, and in such moments, quick access to money becomes crucial.

That’s why having an emergency fund is non-negotiable. Equally important, however, is where you park this money. Given the critical nature of emergencies, your funds should be invested in instruments that are low risk, stable and easy to access, such as debt mutual funds.

In this article, we look at which debt funds are best suited for building your emergency corpus and how to structure it the right way.

Liquid funds are a go-to option

For most investors, liquid mutual funds are an ideal starting point.

As the name suggests, these funds provide instant access to money. Once you redeem your units, the money is credited to your account within 1-2 working days.

They also carry very low risk, since they invest in short-term debt instruments, typically maturing within 91 days. Thus, they are relatively insulated from interest rate swings and tend to offer steady, predictable returns.

Another factor that makes liquid funds ideal for parking your emergency corpus is their returns. Unlike savings accounts, which offer nearly negligible interest rates, liquid funds have delivered annualised returns of 5.9 per cent and 6.7 per cent over one-year and three-year periods, respectively.

Structure your emergency fund the right way

That said, parking your emergency corpus in a single investment may not be enough. Hence, you need to consider dividing the money across multiple layers, depending on when you may need it.

Layer 1: Keep some cash in hand

The first layer comprises money that can be accessed instantly. It should hold typically 1-2 months of your expenses or 10-20 per cent of your emergency corpus.

Such funds should be spread across savings bank accounts and sweep-in fixed deposits. Additionally, you should keep some cash in hand.

Layer 2: Invest in liquid funds

Once your urgent needs have been taken care of, it’s time to build your core emergency reserve.

This layer should pay for emergencies that may arise over the course of the next few days or weeks and ideally hold 3-6 months of your expenses, or around 50-60 per cent of the corpus.

Here, liquid funds are ideal. Not only are they low risk and offer moderate yet stable returns, but redemptions are quick, and there is no penalty for withdrawing early. What’s more, gains from liquid funds are taxed only at the time of exit.

Layer 3: Maintain a buffer for long-term needs

While an emergency fund is meant for immediate, unforeseen expenses, such situations can just as easily arise later. That’s why it’s equally important to set aside money for needs that may emerge over time.

Here, you can consider investing in short-duration debt funds. While bank fixed deposits can also come in handy, their role should be limited, owing to liquidity constraints.

The bottom line

Having an emergency fund is a necessity, not a choice. Unforeseen circumstances can knock on your door at anytime and being prepared can help you ride them out comfortably.

If you want to know which liquid or short-duration debt funds to invest in for building your safety net, Value Research Fund Advisor can help you narrow them down based on your needs. Further, you can get personalised fund recommendations, guidance and portfolio-related advice based on your financial needs.

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This article was originally published on March 17, 2026.