Why should you build an emergency fund with a fixed deposit? - Hindustan Times
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Why should you build an emergency fund with a fixed deposit?

Jul 15, 2020 03:29 PM IST

An ideal emergency fund must offer safety, liquidity, and decent growth to help you meet your monthly obligations and preserve your way of life, without any adverse impact on your CIBIL scores or credit reports.

Stock indices in the recent times have been fluctuating constantly, swinging the economy like a tiny plane hitting turbulence. As market volatilities hit record rates, it seems hard to know when we’ll stabilize. Despite relief measures announced by the government, the economic stress continues to build up with every passing week. According to the Centre for Monitoring Indian Economy (CMIE), a private think tank, unemployment in India reached an unprecedented high of 23.5% in May. Job loss and pay cuts have now become an everyday affair.

The point of maintaining a contingency fund is having liquid cash whenever you require it.(Bajaj Finserv)
The point of maintaining a contingency fund is having liquid cash whenever you require it.(Bajaj Finserv)

In the face of these unprecedented events and looming uncertainty, the need to have emergency funds has come to the forefront. Individuals with an emergency fund are in a better position to support themselves and their families in the event of a financial fallout, or any unwelcome financial impact.

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How to build an emergency fund?

An ideal emergency fund must offer safety, liquidity, and decent growth to help you meet your monthly obligations and preserve your way of life, without any adverse impact on your CIBIL scores or credit reports. Thus, it is advisable to set aside at least three to six months’ worth of living expenses in an emergency fund.

The key, however, is to identify the right financial instrument to build and grow an emergency fund, to not only to tide over the current circumstance, but also for difficult situations in the future. While there are several investment instruments and asset classes, it is crucial to choose an instrument that ensures safety of your savings, to help you sail through difficult times.

Here’s a look at some options that can work as good emergency fund investment instruments.

1.Savings account: The point of maintaining a contingency fund is having liquid cash whenever you require it. In this regard, keeping your security money in a savings account does make sense. However, keeping money in a savings account yields no returns as compared to investing in fixed deposit, which not only ensures liquidity but also grows your capital at a steady rate.

2.Gold: During times of heightened uncertainty, gold tends to become an attractive bet. Since olden times, Indians have accumulated gold to ensure liquidity during times of crisis. The yellow metal is at a record-breaking spree right now. The price rise may only continue till global investors remain cautious, and the trend might reverse with improving macroeconomic fundamentals.

3.Bharat Bond ETF and Gilt Funds: Owing to zero default risk, Bharat ETF and Guilt funds are also considered to be safe. Recessionary trends and uncertain markets are also pushing investors towards low-risk instruments like Bharat Bond ETF. However, the long holding periods might not be as lucrative when compared to a corporate FD. Besides, Bharat Bond ETF are taxed like other debt funds.

The Reserve Bank of India is trying to keep to the benchmark interest rates as low as possible to boost the economy. This has led to an interest in guilt funds, which perform well in a falling interest rate regime. But this also comes with the risk of negative returns, when the rate scenario reverses. Thus, in such a scenario, investing in a Fixed Deposit comes across as a better choice. Unlike market-linked instruments, FD interest rates are pre-determined, which can help you earn guaranteed returns, without any effect of market fluctuations.

Build an emergency fund with Bajaj Finance Fixed Deposit

In order to infuse liquidity in the contracting economy, the Reserve Bank of India has been reducing repo rates, which led to a fall in FD interest rates offered by financiers, due to a downward pressure. After repeated rate cuts, the average FD interest rates in India range from 5-6%, with several banks offering interest rates that are lower than savings accounts too.

In this scenario, Bajaj Finance FD comes across as a lucrative option that offers the right balance of safety and growth of savings. Since you need a high interest rate to build your emergency corpus that can sustain 3 to 6 months of living expenses, at a faster rate.

The best way to grow your savings, is to invest online, so you can reap an additional rate benefit of 0.10% that enables you to grow your savings furthermore. Senior citizens can get 0.25% higher interest rate, regardless of their mode of investment. To plan your investments better, you can always use the FD interest calculator, which helps you know your returns beforehand.

Here’s a look at the tables below, which indicate how an amount of Rs. 1,00,000 invested in a Bajaj Finance FD grows for different customers, across different tenures.

From the tables above, you can see how an investment in Bajaj Finance FD can also offer attractive returns. Thus, in these times, investing in a Bajaj Finance online FD can be a great choice to remain covered against any unforeseen circumstances. For those who are unable to raise a lumpsum, but are looking to create a corpus, Bajaj Finance also offers the convenience of a monthly savings option with Systematic Deposit Plan (SDP). With SDP, you can save amounts starting Rs. 5000 per month, and you can make 6 to 48 deposits, choosing tenures between 12 and 60 months for each deposit.

The best part is that this FD is rated high in terms of safety, with the highest safety rating of FAAA/Stable by CRISIL and MAAA/Stable by ICRA. With a deposit book of more than Rs. 20,000 crores, and the trust of more than 2,35,000 unique FD consumers, you can be assured of the safety of your funds. The fact that this NBFC is one of the only one to have ‘0 unclaimed deposits’ further showcases the extent to which the company goes, to ensure timely credit of maturity amount for all deposit holders.

How to raise money during emergencies?

One of the biggest advantages of an FD compared to other investments is that it can be converted into ready cash when required. On maturity, an FD guarantees assured returns, but if you are in need of funds before the maturity of your FD, you can liquidate the deposit, on completion of the minimum lock-in period of 3 months.

You only need to submit your Original Fixed Deposit Receipt (FDR), which is affixed with a Re. 1 revenue stamp duly signed by all deposit holders, and an application letter addressed to Bajaj Finance Limited, requesting premature closure of your Fixed Deposit account. You can submit these documents at the nearest BFL branch, and have your money credited to your registered bank account within 48 hours.

However, if you do not wish to lose on the interest earned on your deposit, you can always consider availing a loan against fixed deposit that can enable you to get money within 24 hours. This will help you fund your immediate financial requirements at a nominal interest rate, without you having to lose out on your fixed deposit returns.

With convenient investment processes, easier access to your savings and the facility to avail a loan against your deposit, Bajaj Finance FD comes across as a great emergency fund option. Not only does it help you keep your money safe, but also enables you to build a safety net in the event of emergencies.

Disclaimer: This content is distributed by Bajaj Finserv. No HT journalist is involved in the creation of this content.

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