How to Build an Emergency Fund

The disruption created by the Covid-19 pandemic has called for a plan to have an Emergency Fund. An emergency fund is a pool of money set aside for our rainy days.

No one expected last year to be so volatile for the markets and unpleasant for the economy. Coronavirus has disrupted the lives of everyone from rich to poor, from emerging economies to developed economies, from currency to commodities; no one is spared.

Many have started comparing this economic situation to that of the 2008 Lehman crisis, which followed with the good time to get into the markets. So if you are boggled with the question of where to invest now or how to build a portfolio during such times, we have mentioned below 4 easy steps that can guide you to build a portfolio or an emergency fund for yourself in times of crisis.

1)      Examine your Cash Flow:

First and foremost, check if you can maintain the income which meets your monthly expenditure or basic needs. During the current pandemic, salary cuts and business losses have affected a majority of the population throughout the world. If you have an ongoing SIP with a mutual fund, check if you can maintain the periodic contribution without denting your monthly expenditure. If it’s affecting, we suggest you contact the mutual fund company and pause your SIP for a while. If you have a surplus left after meeting your emergency fund, you may then consider investing money into volatile asset classes such as equities.  

 

2)      Understand your risk-taking ability:

Before you invest your money, gauge your risk taking abilities. If you are an investor reaching your retirement, you might want to take a conservative stand, which means investing your money in debt funds. Invest in debt funds that invest entirely in government securities and have no private party risks. Though it seems to be a good time to get into equities, however, due to volatile nature of the market and the uncertainty over of how long the pandemic may last, it’s better to defer until an emergency fund is in place.

 

If you are an investor who is young and has just started his/her career, then your risk-taking capacity is more. In such a case, it’s better to have a higher allocation towards equity. Choose funds that have higher allocation towards Equities and start and investment with as little as Rs. 500 a month. 

 

If you are in the middle of your career or late 40’s of your age, then it’s important that you gradually reduce your exposure towards equity and give your portfolio an exposure towards debt. By investing in balanced funds, you can get exposure towards debt instruments, thus balancing the risk. Also, funds like Multi-Asset Fund can bring in more stability as they do not just give you equity and exposure but also towards gold, thus bringing a good balance in your investment and diversifying the risk.

 

 

3)      Bifurcate between Short-term investments & Long-term investments.

Your emergency fund needs to be separate from funds intended for short-term or long-term goals and should form the base of your portfolio. This prevents you from tapping emergency funds when in need of money during times of need.

 

 

4)      Don’t ignore commodities.

Generally, people tend to ignore this asset class. Still gold as an asset class is an effective portfolio diversifier and serves as a store of value. In an environment where financial markets are taking on the chin, gold stands tall and has helped protect value.

Typically, gold has an inverse relationship with paper assets like stocks and currencies and shines the brightest during extreme economic conditions, thanks to its safe-haven appeal. That gives it tremendous diversification value. It has historically proven to be a store of wealth in times of geopolitical or financial distress. It is a must-have while planning to build your Emergency Fund.

 

Always choose mutual funds to create the portfolio you desire as the Mutual Fund industry is managed by professionals. Mutual Funds are transparent and regulated by the Securities and Exchange Board of India (SEBI), which protects the interest of investors and monitors the functioning of the mutual fund industry. Hence, use them wisely to create your emergency fund.

 

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