Skip to main content

Contingency fund – A good to plan a in fluid times

WE ARE all aware of the term personal financial planning as we have heard about it either on television, read in newspapers or had our advisers use it before us.


Earlier, we could afford to ignore it as “earning returns” was not that complicated. But in the prevailing times, when economies world over are struggling to overcome recession, boost demand and accelerate growth, financial planning gains much prominence. It is more a need and necessity than being a matter of choice.

While financial plans differ from individual to individual and situation to situation, one recommendation that is uniformly maintained is the need for maintaining an emergency fund, a contingency reserve that can come in handy if situation demands. It was a common trend to find most people take this part of the plan lightly and not abide by this recommendation, thinking that they could always swipe their debit/credit cards and access liquidity as and when required.

But times have changed. There is an increased level of uncertainty about almost everything. One can’t be sure of the next day in office or how well one’s business would fare. Liquidity has dried up and despite the stimulus packages and relief measures being announced world over, we are nowhere near the perfect safe world that we were a part of just a year back.

For every earning individual, it is highly essential that he/she maintains a contingency fund at all times. As a thumb rule, it is suggested that the contingency fund be equivalent to at least two-three times of an individual’s monthly household expenses but it is best to follow professional advice to determine the exact fund size.

In times like these, when the economic disturbances are widespread, it is best to increase the size of the reserve fund too. The appropriate fund size would vary for an individual who has multiple EMIs running or who has some other obligation due in short to medium term. For people employed in sectors driven by global demand/ linked to share markets, it makes sense to build their fund size month on month.

So, how does one go about this exercise of planning for a fund reserve? Firstly, try to measure and manage your inflows and outflows effectively. If you have your outflows mostly apportioned for committed payments that you can’t do much about, try and cut on the miscellaneous bit and allocate the same towards your contingency fund. On the other hand, if your cash flows are comfortably placed with minimal obligations, still it would be wise to allocate a part of the monthly package towards maintaining the contingency fund.

Secondly, try and incorporate cash as an asset class in your overall portfolio placement. So, if you have your daughter’s higher education goal for which you have allocated 60% equity and 40% debt, then try and modify the overall asset allocation by introducing cash as a part of it. You can follow an allocation with 55% equity, 35% debt and 10% cash. This cash element shall add further weight to your fund reserve and provide you with the much-needed assurance and mental peace. Expert help to modify the asset allocation in light of current situation is warranted.

Just to create an emergency fund, one cannot and should not mess up with the overall cash flow situation. A step by step approach is the best way to create, maintain and manage a fund like this. So, if you are one of those who never gave a thought to maintaining a contingency fund, there is no need to panic. This is the time when wise and well-planned action can help you sort the case. Start with the minimal amount that can be comfortably adjusted in your situation and then periodically increase the contribution to the fund until you reach the ideal size.

It is also important to know that various investment options are available in which one can maintain a contingency fund. You can either hold cash in hand or in a savings bank account or you can also consider investing in liquid and liquid plus funds offered by different mutual funds. As you build on a reserve equivalent to two-three months expenses, the balance amount allocated to the cash fund can be also be invested in short term debt funds/ gilt funds with a view to earn better returns across the specified term.

It is best to view your financial life as a whole rather than follow a piece meal approach. If the current times can help us learn from our past mistakes and reinforce in us a strong well-defined approach towards managing our hard earned money, then why shy away from it.

Popular posts from this blog

What is Electronic Clearing Service (ECS)?

  As the name suggests, it's an electronic process through which money can be transferred from one bank account to another. According to RBI, this mode is usually used for regular payments and receipts, like distribution of dividend, interest, salary, pension etc. This mode is also used for collection of bills for telephone, electricity, water, various types of taxes, payment of EMIs , investments in mutual funds , payment of insurance premium etc. There are two types of ECS , like most other banking transactions, ECS credit and ECS debit. An ECS credit is used by a bank account holder , usually a large company or an institution for services like payment of dividend, in terest, salary, pension etc. If your mutual fund pays you dividend to your bank account, of all probability it is being paid through ECS credit.ECS debit, on the other hand, is used when a company or an institution is getting money from a large number of people. For example if you are investing in a mutual fund sc...

WEALTH TAX

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 WEALTH TAX   WHAT CONSTITUTES WEALTH? For wealth tax purposes, "wealth" means property , urban land, car, jewellery , yacht, boat, aircraft and cash in hand in excess of Rs 50,000. CAUTION POINT | Do not think you will have an easy escape from wealth tax by transferring your `wealth' without consideration to your spouse or minor child. Such assets will also be considered as your wealth. HOW TO DETERMINE YOUR TAXABLE WEALTH Add the taxable value of the above assets (computed as per the detailed rules for valuation) owned by you as on March 31 (for FY 2014-15, it will be March 31, 2015). In case you sold your car during the year, it will not be taxable wealth. Deduct loans if any obtained by you to acquire any of the taxable assets from the value of gross tax out for at least 300 days in a...

Equity Savings Fund

Invest Equity Savings Fund Online   The best part about these funds is that they are subject to equity fund taxation and at the same time are structured like MIP like funds . This new category, equity savings funds , offer a little of everything. They allocate money to equities & equity related instruments, and fixed income. They aim to generate returns by diversification. Such funds invest in fixed income and arbitrage to protect the investors from short term volatility and equity for capital gains. The best part of these funds is that they are subject to equity fund taxation and at the same time are structured like MIP funds.   MIP funds however are subject to debt fund taxation. Investors Equity savings funds are suitable for the following: First time investors who seek partial exposure to equity with less volatility and greater stability Investors seeking moderate capital appreciation with relatively lower risk Those wh...

How to Pick Top Performing Mutual Fund Schemes

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   How to Pick Performing Schemes  Funds that continue to stay in the top grade of performance over longer periods are the ones to bet on, advise investment experts   The mutual fund performance charts of the past few months make for an impressive reading. Funds across all categories boast of stellar returns. Sample this: The mid and small cap category has averaged 77 percent return over the past 12 months, with the best fund delivering a staggering 120 percent. The tax-saving funds also average an impressive 51 percent, including a fund which has soared 92 percent. Many of the table-toppers are funds of proven quality and track record. However, there are also schemes that are not that well-known. Some of these have rarely made it to the performance charts in the past, yet, of late, they bo...

8% Government of India Bonds quick guide

For those seeking comfort in safety of returns, the Government of India issued 8% savings bond once again comes to the fore. First launched in 2003, these bonds are issued by the government with a maturity of 6 years. The bonds are available at all times with specified distributors through whom you can apply to invest in them. Here is a quick guide to what the bond offers and its features to ascertain to check for suitability. What are Government of India bonds Government of India bonds are like any other government bonds with specified rate of interest. The rate is fixed at 8% per annum paid half yearly, or you can opt for cumulative payment of interest at the end of the tenure. You can buy these bonds from State Bank of India and its associates, other nationalized banks and some private sector banks such as HDFC Bank Ltd and ICICI Bank Ltd, among others. The bonds can be bought from the offices of Stock Holding Corporation of India as well. They are available in physical form onl...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now