Investment Strategies: Where Should You Park Your Emergency Fund?

by Vinaya HS on September 16, 2010

in Finance

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A reader asks,

I have an emergency fund that doubles up as a buffer for unforeseen expenses and for the pink slip. I currently have three-months’ worth of expenses in this fund which is lying as a cash balance in my savings account. How can I structure this fund in order to earn a better return?

What do you think of this strategy?

  1. Retain 1/4 of the fund as a cash balance in the savings account.
  2. Move 3/4 of the fund into a pure-debt fund.

I did some research and found HDFC’s Cash Management Plan Savings Plan (Growth) (no entry load, no exit load, high liquidity) to be a good choice for #2.

What do you think?




Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.

{ 6 comments… read them below or add one }

Vinay September 16, 2010 at 12:27 AM

Vinaya- I am also in the same boat like yours. I will review HDFC Cash management Saving Plan.

I am reviewing the following:
a. DSP Blackrock top 100 Equity (growth)
b. DSP Balanced Fund (growth)
c. Franklin India Blue Chip and Prima Plus (growth)
d. UTI Master Value Fund (growth)

Vinaya HS September 16, 2010 at 8:40 AM

This year in particular, DSP Blackrock Top 100 Equity hasn’t performed as well as its peers have. I also remember reading somewhere (Morningstar or Value Research…not sure) that Franklin India Prima Plus hasn’t really been up to the mark of late.

Ajay September 17, 2010 at 1:14 PM

Vinaya,
My take is a CD ladder (or shall we call FD ladder for India :) and in a nationalized bank) that you suggested in one of posts. I know by putting into MFs one can gain a better return than a FD, but then it is a buffer that one has built to depend on when handed a pink slip. So why take risk ?

Vinaya HS September 17, 2010 at 2:26 PM

Good idea too.

In that case, 1/4 of the fund would remain as a cash balance in the savings account and the remaining 3/4 of the fund would be in a 3-month CD/FD ladder with each of the 3 FDs having a face value equal to 1/4 of the fund to begin with. Perfectly safe and reasonably liquid.

When in need, you’d first use the cash balance. You’d next break that FD with the nearest maturity date.

Anoop September 27, 2010 at 8:02 AM

Hi Vinay,
I have more than a year buffer on emergency funds for pink slips etc, I’ve already invested in many FD’s, I am yet to take up an option of ppf account which I would soon do..
Can you educate me more about this HDFC Cash management Plan Savings Plan?, I already have an HDFC salary account.

Vinaya HS September 27, 2010 at 2:54 PM

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