An emergency fund is a crucial corpus that could reveal to be a lifeline in dire circumstances that call for an urgent need for cash or simple, uncomplicated access to funds. You could rely on this fund in a crisis or under unforeseeable circumstances. Here’s how to set up an emergency fund to cover unforeseen expenses.
How to Invest in your Emergency Funds?
Debt funds are suitable for investors who desire a steady income but are risk-averse. Debt funds are less riskier than equity funds since they are less volatile. Debt mutual funds may be a better alternative if you have been saving in conventional fixed-income securities like Term Deposits and are seeking constant returns with little volatility. They assist you in reaching your financial objectives in a more tax-efficient way and, as a result, produce higher returns.
Income funds
According to the fund’s objectives, they invest primarily in debt instruments of various maturities, with any leftover money going into short-term investments like money market securities. The majority of the products that these funds invest in have medium to long-term maturity.
Short-term funds
Investments in debt securities with a shorter maturity or length make up the majority of short-term debt funds. Government securities, debt, and money market instruments make up most of these. These funds have an investment horizon greater than liquid funds’ but shorter than medium-term income funds’.
Gilt funds
A gilt fund invests in government securities from the federal and state governments with various maturities. Since the government is the one that issued the instruments, these funds often don’t run the risk of defaulting. Investments in Gilts with both short- and long-term maturities are made by gilt funds.
The interest rate risk associated with gilt funds varies based on their maturity profile. The risk related to interest rates increases with the length of the instruments’ maturity profiles. Interest rate risk suggests that interest rate changes impact the market price of debt instruments.
Which Debt Funds Are Safe?
The safest debt fund is the Overnight Fund. These funds invest in assets with a one-day maturity, which eliminates all credit and interest risk and almost eliminates the possibility of a loss. Though they can only invest in money market instruments with maturities of up to 91 days, liquid funds are among the safest subcategories. This lowers the credit and interest rate risk these funds may be exposed to.
Benefits of Debt Funds
Stability
The value of your portfolio can also rise by investing in debt funds. Equity funds may be unpredictable. This is so because the stock market’s growth is directly correlated with the returns on equity funds. By investing in debt funds, you may adequately diversify your investment and lower overall risk.
Regular income
Debt funds can provide capital growth over time. Despite having a lower level of risk than equity funds, returns from debt funds are not guaranteed and are susceptible to market hazards.
Tax effectiveness
Many individuals invest money primarily to lower their yearly tax expenses. Therefore, consider investing in a mutual debt fund if tax minimization is a top financial priority. This is due to debt funds’ higher tax efficiency than conventional investment types like fixed deposits (FDs).
Flexibility
You also have the choice to transfer your money across other debt mutual funds. A Systematic Transfer Plan makes this feasible. Here, you can make a one-time investment in debt funds and gradually convert a tiny piece of that money into equity over time.
Instead of investing the entire sum at once, you can do this to spread out the risk of stocks over a period of a few months. This level of flexibility is not available to investors through other conventional investment options.
Final Thoughts
Debt mutual funds are worth considering if you’re searching for relatively constant income compared to stocks and have little exposure to market risk. Depending on your investment objectives and time horizon, you can choose from various debt fund types, including ultra-short-term debt funds, liquid funds, fixed maturity plans, and many others.