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Goal Based Investing

Build Contingency Fund

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.

  • You may have to borrow from bank / friends / relatives to meet your expenses.
  • You may be forced to sell-off your assets that are earmarked for your future financial goals.

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

  • Savings Bank account
  • Liquid Funds & Ultra Short-term funds
  • Arbitrage Funds