VR Logo

Bank interest rates have fallen. Where should I park my emergency savings?

Consider investing in liquid or high-quality short-duration funds, says Dhirendra Kumar

I am keeping an emergency fund of about Rs 5 lakh in savings, as my bank was giving about 6 per cent interest. Now that it has reduced it, where should I park this money? I am 29 and unmarried.
- Ritesh

It is good to have an emergency fund. Your emergency fund should be invested in a manner that you have absolutely no anxiety about getting it back whenever the need arises and is not subject to any major risks.

Now, suppose instead of 6 per cent, you will get 4 per cent, it is important to understand how meaningful the difference will be. Here, from Rs 30,000 previously, you will now be able to earn Rs 20,000.

With age on your side, you may consider investing in liquid or high-quality short-duration funds as they may possibly get you a little more. Also, it will be tax efficient. While only Rs 10,000 interest on your bank deposit is tax-free, in debt funds, all money is tax sheltered until you need it. Further, if you end up holding this investment for more than three years, it will be treated as a long-term capital asset and you will be able to adjust the gains for inflation through indexation. Post indexation, it is even more tax efficient.

Besides, if this emergency fund is not needed, it may end up being your long-term fixed-income investment, so do that.