How to go about setting up an emergency corpus

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The coronavirus-induced disruptions have made us realise the importance of building a robust emergency fund.

An emergency fund is an essential corpus that one must keep aside to tackle emergencies.

It is very critical to design an emergency fund specifically to meet unanticipated financial shortfalls that may arise.

Bajaj Capital Limited’s Chief Product Officer Vinay Taluja addressed queries related to emergency funds from our callers across India.

Here’s a look at some queries:

Devika Mohite: I am a teacher earning Rs 45,000 per month. I have health insurance cover for my family and Rs 1 lakh in FD. I am also investing Rs 14,000 via SIP in MFs. Do I need any additional emergency funds?

Taluja: Definitely, Devika. You have protected yourself with health insurance, so your health expenses are covered in case of medical emergencies. But in case of OPD treatment or any other unexpected expenditure, you will need some other source. Based on your monthly income and expenses I would suggest you keep at least Rs 1.5 to Rs 2 lakh emergency corpus in other products.

Abhishek Mall: Is it necessary that the return of emergency funds beat inflation?

Taluja: There is a difference between saving and investments. Savings don’t fetch you any returns. On Investment you earn some returns, it will vary from one product to another. Normally we advise our clients that their investments should have returns that beat inflation. But this rule is not applicable to the emergency corpus. The emergency corpus should be liquid, and returns generating from short terms or highly liquid products are less.

Pritam Chakraborty, Kolkata: We are a family of four. I am majorly taking care of the monthly expenses of Rs 60,000. My son’s education costs Rs 10,000. Amidst the growing uncertainties, how much amount should we keep as an emergency fund?

Taluja: As a thumb rule, I suggest keep 3 to 6 times your monthly expenses in your emergency fund. You can put some amount partly at home, some in liquid funds, short-term debts, and bank savings.