Ask Morningstar: Liquid funds for your Emergency Fund

Himanshu Srivastava, associate director of manager research, answers a reader's query.
By Himanshu Srivastava |  16-11-22 | 
 

I am planning to build an Emergency Fund. I have decided to park 30% as cash and remaining 70% to liquid funds. I have selected Nippon India Liquid Fund and ICICI Prudential Liquid Plan. What are your views on these two funds?

I am not sure how to deploy the money. I have the amount that needs to be parked. Can I just deposit the lumpsum or must I do an SIP?

Most of the liquid funds have almost similar investment as well as return pattern. The major differentiating factor would be the expense ratio. Therefore, one can look at liquid funds from fund houses which have a strong fixed income investment team, and then select a fund which has low expense ratio. Lower expenses do make a meaningful difference in the returns over the long term. From this perspective, both Nippon India Liquid Fund and ICICI Prudential Liquid Plan makes the cut. You can consider diversifying your investment across both these funds.

Your decision to park 30% of your Emergency Fund in cash and 70% in liquid funds would depend on how much amount you would like to put aside as emergency fund, and are there any existing circumstances (for example ailing parents or someone else in the family with any medical condition), which needs to be accounted for. Prima-facie this looks like a wise approach though.

SIP has two major benefits. One, it brings in an element of discipline in investing, and two, it does away with the concept of timing the market, which is more apt in case of equity investing. SIP works well in case of equity funds. However, as far as investing in liquid funds are concerned, you can consider investing the lumpsum amount.

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Articles authored by Himanshu Srivastava

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