An emergency fund of ₹10 lakh can provide financial support during a job loss, medical emergency or an unexpected household expense. However, keeping the entire amount in a savings account may mean earning relatively low interest, while locking it all into fixed deposits or mutual funds could make accessing the money less convenient when it is urgently needed.
The challenge is to balance three priorities: liquidity, capital safety and returns. Financial experts say an emergency fund should be divided according to how quickly the money might be required, rather than invested entirely in the instrument offering the highest returns.
How should you divide ₹10 lakh across savings accounts, FDs and liquid funds?
For someone with a ₹10 lakh emergency fund, one possible allocation is ₹2 lakh in a savings account, ₹4 lakh in liquid mutual funds and ₹4 lakh in fixed deposits, preferably staggered across different maturities.
Rhishabh Garg, CEO of FundsIndia.com, suggests this allocation. According to him, the savings account should ideally cover one to two months of expenses, while the remaining amount can be divided between FDs and liquid funds depending on the individual's preference for certainty or flexibility.
Another approach is to keep ₹1.5 lakh in a savings account, ₹4.5 lakh in liquid mutual funds and the remaining ₹4 lakh in an ultra-short duration debt fund.
Sandeep Jethwani, co-founder of Dezerv, recommends this allocation based on how quickly each portion of the money might be required. The savings account can cover immediate expenses, such as an emergency hospital admission, while liquid funds provide access to additional money.
The ultra-short duration fund holds the portion that is less likely to be needed during the first month, although returns are market-linked and not guaranteed.
Savings account, FD or liquid fund: Which is safer and easier to withdraw?
The three options differ significantly in how quickly investors can access their money.
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