My emergency corpus is parked in liquid funds, are these funds still safe? Where should I invest my emergency fund and how much contingency fund should I have now? Given the scenario, do I need to increase my fund size?
In times of risk aversion, a lot of investors are getting anxious and worried that their liquid fund may not be safe, but it is not so. While there have been one or two instances that are causing the fear, liquid funds, over the years, have been tightened substantially.
But I would say that the experience from such instances itself drove most mutual funds to reorganise their portfolios in a far more conservative way. So, your emergency fund can well be parked in liquid funds with reasonable confidence.
I feel the accident that we saw in liquid funds was of an exceptional kind and I think the lesson has been learnt. But of course, we can have some other kinds of calamity. Regarding the size of your emergency fund, I would say that you are the best person to judge that. It is not for an expert to do that estimation because you know your conditions and circumstances. Ask some loud questions like - what is the likelihood of you losing your job? How many dependents do you have? What are your living expenses? And how much of them can you curtail?
For these reasons, even if there is a need to pull out of equity and move to liquid funds, then do that. Because it's very important to have your peace of mind and be assured that for one, one-and-a-half years, you have nothing to worry about and that everything will be fine while you are trying to rejig yourself.
Also, in this context, I would like to tell you that we have been getting a lot of emails from our viewers and readers, asking whether they should liquidate their investments and clear up their loans. I would say don't do that, retain that money. During these times, it's important, as Mr. Munger says, that do nothing. It's important to have that borrowed money. Even if you have created some money for repayments and you are in good preparedness, it is better to keep that money with you. Put it in a liquid fund, keep it in a safe manner and let a couple of months pass by and then, you can clear up.
To reiterate, it is good to have that money in hand than be cleared of that liability and as a consequence be immediately out of pocket. So, take things easy and have that buffer from wherever it comes by.