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

Mutual Fund Review: Religare Tax Plan

Tax Plan is one of the better performing schemes from Religare Asset Management. Existing investors can redeem their investment after three years. But given the scheme's performance, they can continue to stay invested   Given the mandated lock-in period of three years, tax saving schemes give the fund manager the leeway to invest in ideas that may take time to nurture. Religare Tax Plan's investment ideas revolve around 'High Growth', which the fund manager has aimed to achieve by digging out promising stories/businesses in the mid-cap segment. Within the space, consumer staples has been the centre of attention for the last couple of years and can be seen as one of the key reasons for the scheme's outperformance as compared to the broader market. It has, however, tweaked its focus and reduced exposure in midcaps as they were commanding a high premium. The strategy seems to have worked as it returned a 22% gain last year. Religare Tax Plan has outperformed BSE 100...

Mutual Funds: Past Performance is not just everything

Many a times your agent / distributor / relationship manager tries to push you some mutual fund schemes by enticing you with a typical sales pitch…"Sir, this scheme has generated 20% returns in the past one year." And this sales pitch often gets louder when the market conditions have been favourable. Some of the agents / distributors / relationship managers have another unique way of luring you. They say, "Sir / madam this scheme has been awarded the best scheme award in the past by a leading business channel"... And hearing all these sales talks you investors very often get attracted and sign a cheque in favour of the respective scheme.   But please ask yourself do you hear these sales talks when the capital markets turn turbulent? Why is it so that your agent / distributor / relationship manager avoids talking to you during turbulent times of the capital markets and doesn't boast about returns generated by the respective funds or awards being conferred on t...

Dynamic Bond Funds

Invest Mutual Funds Online Download Mutual Fund Application Forms Apart from liquidity and returns, tax efficiency is another factor which should be taken into account for such investments. Today, while you're getting decent, predictable returns from bank fixed deposits, they, along with FMPs, can be ruled out as options because of the lack of interim liquidity. Hence, the only other option that you have is a dynamic bond fund. While investments in dynamic bond funds can be a compromise in terms of returns, they are extremely liquid and more tax efficient.   Some of the dynamic bond funds that you can invest in are: UTI Bond Fund, Birla Sun Life Dynamic Bond Fund Templeton India Income Fund ------------------------------------- Invest Mutual Funds Online Transact Mutual Fund Online   Download Mutual Fund Application Forms from all AMCs Download Mutual Fund Application Forms   Best Performing Mutual ...

L&T Tax Advantage

Best SIP Funds to Invest Online   The fund follows a growth approach to investing in quality stocks that have a large-cap tilt This large-cap tilted ELSS has fared consistently and fared better than its benchmark by posting a higher margin of outperformance. The fund follows a growth approach to investing in quality stocks that have a large-cap tilt, which is evident in its portfolio. The portfolio is further well diversified across market capitalisation and sectors with over 60 stocks finding a place in it. The upside with this fund is the fact that it has witnessed both down and up cycles of the market to come across as a winner in the long run. Do not doubt the fund based on its size and a few mediocre years of performance, because when analysing its rolling three year returns, the fund's performance stands out to qualify as a must have ELSS in one's portfolio. Stay invested through the lock-in and there are chances of benefiting from returns as well as tax savings will prov...

Tax Planning: Income tax and Section 80C

In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000. The various investment options under this section include:   Provident Fund (PF) & Voluntary Provident Fund (VPF) Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution. While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free. Public Provident Fund (PPF) An account can be opened wi...
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