Importance of Emergency Funds in Falling Markets

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Lockdowns, market crashes, job losses and calamities are emergencies that many people have faced in the past few years.Such situations do not come with a warning and take the unprepared down with them.Emergency funds not only keep you prepared for unexpected little bumps but also don' t let those emergencies turn into inconveniences.

Emergency funds are an important aspect of financial planning and protect you from financial storms. Regardless of one’s financial state, putting aside a small amount of money (approximately 5-10% of your income) monthly or at regular intervals can help during uncertain circumstances.


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Just imagine, a family that owns several properties in Mumbai. One of its members falls critically ill, which requires more money than what is available at hand. As a result, they decided to sell a house off to fund the medical expenses. Going from one broker to another, to find the best price for the property doesn’t make much sense, does it? Also, a sale in distress doesn’t fetch you the best price for your asset. Not to forget the amount of paperwork that goes into selling a house. Instead, having money in a bank account that can be accessed almost immediately makes things a lot easier. The point of an emergency fund is to be able to get your hands on money as soon as disaster strikes without letting it cause you any more harm.


While emergency funds should be liquid, they are not meant to be accessed frequently. Hence, they must be invested in a manner such that it not only provides security but also gives good returns without having to compromise on liquidity. Parking your emergency funds in high risk-return sectors is never a good idea as it can lead to a high chance of losing the capital altogether and defeats the purpose of an emergency fund. On the other hand, liquid as well as short term mutual funds, savings accounts with sweep-in facilities etc. are some safe, return-providing options that an individual can consider for parking emergency funds. Emergency Funds in the form of investing may also attract taxes on gains, hence an avenue where tax implications can be balanced must be chosen.

There can be two types:

  • Short-term emergency funds:
    • • Meant for instant access; cash that can be withdrawn instantly or bank transfers.
    • • Do not offer substantial returns.
    • • Can be relied on until long-term funds can be accessed in case of grievous emergencies.
  • Long-term emergency funds:
    • • Savings for extreme situations like falling markets, pandemics, health emergencies, job loss etc.
    • • Higher rates of return
    • • May take a little longer to liquidate

    You cannot expect to build your emergency funds overnight as it requires setting aside money regularly. It may take months or even years to reach a satisfactory amount. Initially one must assess their income and expenditure on a monthly basis, following which a goal amount can be calculated. Still confused about where to start? Here’s an estimate of what your emergency fund could look like:


  • 3-6 months of salary
    • • If you have a stable job
    • • Your area of residence is low-cost
    • • You could find a new job soon after losing one
    • • You are independent or have another family member bringing an income.
  • 6-12 months of salary
    • • If your job isn’t very stable
    • • If your area of residence is high-cost
    • • If you have children or are the sole breadwinner

    For example, Mouni is earning Rs. 1 lakh every month and her expenses are around Rs. 50,000/-. How much money should her emergency fund hold as a single individual with a stable job?

    As per the recommended size suggested above, her emergency fund should be around 3-6 months worth of salary ie. around 3 to 6 lakh. Taking the upper limit on the safer side, if she sets aside Rs. 30,000 in her emergency funds out of Rs. 50,000 savings, it will take her 20 months to build my emergency funds.

    During Covid-19, we saw market crashes, inflation, unemployment and a shortage of medical services.If it has taught us anything, it is that emergencies are unpredictable and can turn anyone' s life upside down, both medically and financially.-.This is why we need to lay emphasis on financial education and awareness, especially in developing countries like India.The bottom line is that being able to build a small emergency fund depending on one' s capacity is much more advantageous than having nothing to turn to.It' s never too late or early to start.Slow growth is still growth.