How to build an emergency fund using an SIP and calculate its returns?

An exigency fund is a crucial corpus that rescues in critical scenarios like job loss, accident, or any unforeseeable exigency, which need immediate monetary assistance or simple and hassle-free fund access. This is a backup you can fall on in times of financial crisis or any unforeseen situations. Here’s how you can create your exigency fund using an SIP and the measure you must adopt to compute its returns.

How much emergency fund you must create?

Every individual has distinct financial requirements. Before computing the exigency fund that you require, it is crucial for you to compute the minimal amount you would need to get through unavoidable monthly expenditures. This must involve home rent, utility bills, loan instalments, etc. Make sure that you do not involve avoidable expenditures like travel, movies, dining, etc. while computing your exigency fund requirement. Only include your monthly mandatory requirements. Once you are aware of your monthly mandatory expenditures, try and create an emergency fund that can assist you to survive at least six months if you receive no income

Where should you keep your exigency fund?

Once you have finalised your emergency fund requirement, begin working towards it. To invest to form your emergency fund, you must invest in the SIP mode in liquid funds. This is because liquid funds provide high liquidity, capital protection and better returns than other fixed income instruments like savings bank accounts, recurring deposits, or fixed deposits. Note that to compute your monthly investment to form your exigency fund, you must use an online SIP calculator. All you must do is input your overall emergency fund requirement, assumed interest rate and preferable time horizon to attain this goal. Once you input all these figures, the monthly investment requirement will be displayed instantly on the SIP investment calculator. Based on this figure, you must begin with your investment for your emergency fund. In case you are unable to understand this, read this example to get an idea.

Suppose you require an emergency fund of Rs 5 lakh within a time horizon of 2 years at an assumed rate of return of 8 per cent per annum. Now, if you input these figures into the online mutual fund investment calculator, you will find, you require to invest a monthly SIP amount of Rs 19,280 over 2 years to accumulate an emergency fund of Rs 5 lakh.

Ending note

In present times, many strive to attain financial independence before reaching the age of retirement. While this requires a fair amount of strategic investment and planning, it all starts with forming a contingency fund that can take good care of all your unplanned expenditures in the upcoming times. While it appears extravagant during usual times, during financial emergencies, it can extremely be advantageous. So, if you have not planned your emergency fund requirement, ensure to begin as soon as possible.