Things to consider when planning to create an emergency fund

This fund should be big enough to cover unavoidable expenses like daily household expenses, children’s tuition fee, existing EMIs, utility bills, expenses on medicines, insurance premiums, etc. for at least 6 months, said Gaurav Aggarwal — Senior Director, Paisabazaar while talking to CNBC-TV18.com.

As a financial exigency can strike anytime, one should always park emergency fund in highly liquid financial instruments with high capital protection features, Aggarwal said.

As a rising interest rate regime adversely impacts the returns generated by market-linked fixed income instruments and increases the risk of capital erosion, you should park emergency fund in high yield savings accounts offering interest rates of around 6-7 percent per annum in the current economic scenario, as per Aggarwal.

Those comfortable with internet and mobile banking can park their emergency fund in high-yield bank FDs offering interest rates of 7 percent per annum and above, Aggarwal told CNBC-TV18.com.

Investors can park around 30-50 percent of the investible corpus in liquid funds as they offer high liquidity along with better returns than a savings account, according to Harsh Jain, Co-founder and COO, Groww.

Average returns on liquid funds hover around the 6-8 percent mark. With low risks and an opportunity to earn good returns, these funds can help in creating the corpus in a shorter period.