Don't think of emergency money in liquid funds as a sub-optimal allocation, suggests Ashutosh Gupta
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Liquid funds are recommended for emergency needs, but they may end up remaining invested for the long term unless there's an emergency. It is also not advisable to invest in liquid funds for over three months. How to resolve this dichotomy?
- Nihar Mayekar
There is really no dichotomy. While investing, if you know this money is something you would not need for at least one year or more, liquid funds certainly are not a suitable category. One should then look at other debt fund categories which are more suitable for your investment horizon.
But with emergency corpus, this is the money which needs to be at your call at very short notice. Therefore, most important when allocating for this purpose is a high degree of safety and liquidity. Those are the kind of parameters that liquid funds can potentially fulfil. Of course, this money may remain invested for a reasonably long time, and in an ideal world, one would hope that an emergency never arises for which one needs to draw from this allocation. But that is the whole point about contingency planning: you never know when you land up in a contingency. So from that perspective, even if this money remains invested for a fairly long term in liquid funds, that should be fine because your purpose with this allocation is not to derive returns. So don't think of this money remaining invested in liquid funds as a sub-optimal allocation. Otherwise, the alternative you have is to keep this money lying idle in your bank account, where the chances of earning even less than a liquid fund are pretty high.
So I would suggest not to get too confused about this dichotomy. Just keep your emergency corpus in a liquid fund irrespective of the time horizon.