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K Ajith Kumar Rai, Chairman ,
The purpose of maintaining a contingency fund is mainly to fund any unforeseen expenses like hospitalization or to take care of your family when there is a loss of job or job transition where there is loss of monthly income. A contingency fund also comes to use even when there is a loss in business.
While these circumstances are inevitable, we should be financially prepared to face them. A contingency fund can help you take care of your family’s expenses when encountered with such situations. Absence of a contingency fund during such exigencies can result in either of the following.
As a thumb rule, we need to provision for 6 months of your monthly regular expenses. Ideally, the contingency fund is created through low-risk investments since the risk tolerance for this basket is close to nil.
The most important feature a contingency fund should have is the liquidity. It should be liquidated easily to fund the unforeseen expense.
The different instruments one can use to create a contingency fund are