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Part - III
How Much to Invest
To determine how much to have in your emergency fund, take into account your medical & accident insurance.
The more insurance net you have, the less you need to invest in your EF.
Also, if you have access to cheap credit like overdraft facility against shares, homes & cars, you can moderate the emergency fund amount.
Where to Invest
There are 3 main options:
Savings Account
Savings-cum-FD A/c
Liquid Funds
Depending on your liquidity requirements of the identified risks, you can allocate your funds among these options. For Ex: if you foresee more expense bloating risks, savings & savings-cum-fixed deposit accounts are your best bet.
Liquid Funds
If your risks are more in nature of income reduction, you will not need full EF immediately.
So, consider parking more proportion of EF in Liquid funds. They are almost safe as FDs & are more tax efficient.
Returns-If u stay u invested for more than 1year-will be taxed as long term capital gains at 10%. This compares favorably with 30% paid by hose in highest tax bracket (assuming you have an annual income of less than Rs 8.5 lakh & have exhausted the section 80L limit of Rs 12,000p.a) for FDs.
What is important that u do a good study of the fund u are investing. "The Fund must have a good branch network so that your money remains accessible when u need u it" Says Mashruwala. He discourages people from liquid funds if there's no access to branch offices. "It is also a good idea to keep some money in Bank FDs & some cash at home".
Kohli's suggestion: "Consider large funds with a corpus of Rs 250 crore or more with a good track record." Experts also recommend the dividend reinvestment option. "This makes sense since you will not be looking for regular income from this investment," says Rajat Jain, Chief Investment Officer, Principal Mutual Fund.
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* Contributed by -
Prashant Jadhav,
2nd Year PGeMBA (Finance),
Mumbai Educational Trust (MET) Schools of Management, Mumbai.
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