Career Search

Monday, May 20, 2013

Why is Contingency Fund so important?

Invest In Tax Saving Mutual Funds Online

Call 0 94 8300 8300 (India)

One of our Financial Planning client Mr. X (Name changed to protect privacy) working with an IT firm as a consultant was informed about the slowdown in IT industry. The consequences of slowdown in IT industry can be so dramatic that he might end up losing his job in next couple of months. God forbid, but if he really does lose his job, the financial goals which he dreams off such as cozy retired life, giving the best to children – be it education or even getting them married-off well amongst others; may all go haywire, but more concerning would be funding his day-to-day expenses to run a home including the EMI for a home loan.

Mr. X might stop investing for his financial goals till the time he finds a new job but his regular expenses such as household Expense of Rs. 25,000 p.m., medical Expense of Rs. 5,000 p.m., child School Fees of Rs. 10,000 p.m. and EMI on home loan of Rs. 15,000 p.m. has to be met in any case. Cumulating these entire expenses he cannot avoid paying a sum of Rs. 55,000 p.m. and other regular expenses.


Therefore, you see a need arises to primarily have a contingency fund to confront such a situation and embarrassments. Typically a contingency fund consists of 6 to 24 months of regular expenses. This includes all necessary expenses, but can exclude luxuries.

Contingency Fund Requirement of Mr. X

Expenses

Amount p.m. (Rs.)

Household Expense

25,000

Medical Expense

5,000

Child School Fees

10,000

EMI

15,000

Total Expenses

55,000

6 months Expenses

330,000

24 months Expenses

1,320,000


In the case of Mr. X, 6 months of expenses would be Rs. 3,30,000, and 24 months of expenses if Mr. X chooses to be conservative in his outlook, would be Rs. 13,20,000.

Many a times when people first hear that it is important to keep at least 6 months and up to 24 months of expenses aside as a contingency fund, they tend to think of it as a large sum. Often the reasoning is, this money is just lying idle, and that means it is losing out on what it could earn if deployed into an asset classes such as equity, debt and gold. (In order to utilize your contingency fund effectively,


But that's not what a contingency fund is for.

You see, the purpose of having a contingency fund is to take care of your family and your expenses in an emergency situation, such as loss of job, markets crashing, medical emergency or any unfortunate event that come with an economic loss for some time.

Often there are financial obligations that are absolutely must to meet no matter what your professional or personal situation is. Loan EMIs are a prime example. This is why you must have a contingency fund. So that if for some reason, your cash inflows reduce or halt or your expenses suddenly shoot up more than your income, you don't have to worry because you have anticipated this and have set the funds aside. In the case of Mr. X, he chose to build a 1 year contingency fund because his cash flow uncertainty was higher, being a consultant. This 1 year of contingency fund will help him to take care of his regular expenses in case he really loses his job and will also give him time to find a suitable job in next 1 year without worrying much about his regular expenses.

So what to do if you don't have a contingency fund?


Your first step should be to start saving for at least 6 months of your regular expenses before investing for any financial goals and keep it in a savings bank account or if you want a better return than putting money into a savings bank account, then opt for sweep in account, flexi deposit or liquid funds. Once 6 months of your contingency funds are available then your next aim should be to increase it to 12 or 24 months of regular expenses which can be done in phased manner over a period of time. If you have any EMIs you must remember to include them in your regular expenses when building up your contingency fund.

Remember, there are events such as job loss or illness that can get in the way of your regular cash flows, but this should not get in the way of letting you achieve your life goals with consistent investments into the right investment avenues.

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

Invest Tax Saving Mutual Funds Online

Tax Saving Mutual Funds Online

These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

  1. ICICI Prudential Tax Plan Invest Online
  2. HDFC TaxSaver Invest Online
  3. DSP BlackRock Tax Saver Fund Invest Online
  4. Reliance Tax Saver (ELSS) Fund Invest Online
  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) Fund Invest Online
  7. SBI Magnum Tax Gain Scheme 1993 Invest Online
  8. Sundaram Tax Saver Invest Online
  9. Edelweiss ELSS Invest Online

------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver MutualFunds Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

No comments: