Can money market funds be used to build an emergency corpus?

With high liquidity and potential for relatively stable returns, money market funds can be a suitable investment avenue for building an emergency corpus. Money market mutual funds invest in relatively short-term debt instruments and aim to provide liquidity and relative stability to capital invested with the potential for modest earning. Read on to learn about the role of liquidity in money market fund and the uses of money market fund for building emergency fund.

• Table of contents

1. Understanding the role of liquidity in money market fund
2. Can money market funds be used for building emergency funds?
3. Factors to consider when using money market funds for emergency funds

Understanding the role of liquidity in money market fund

Liquidity refers to the ease with which an asset can be converted into cash – in other words, it measures how quickly and easily you can access your invested money. The liquidity of money market funds is typically high because they invest in short-term instruments such as commercial paper, treasury bills, and certificates of deposit, with a maximum maturity of a year.

Can money market funds be used for building emergency funds?

An emergency fund is a crucial part of any financial plan, providing cushion for unexpected expenses. Money market funds may be a good investment option for building an emergency corpus owing to their liquidity. Secondly, they are relatively low risk, which means there is a potential for relatively stable returns in money market fund investment.

Factors to consider when using money market funds for emergency funds

While money market funds can be suitable for building an emergency fund, there are some factors to consider before investing.

Interest rates: Money market funds offer a reasonable return potential, but the return rate may not be as high as other investment options such as equity-oriented funds or long term debt funds.

Liquidity: As mentioned earlier, liquidity is an important aspect of money market funds. Make sure that the fund you choose invests in instruments with good credit quality, so you can access your money quickly and easily.

Fees and expenses: Money market funds charge fees and expenses, which can eat into your returns. Look for a fund with low fees and expenses.

Risks: Money market funds invest in relatively stable instruments, but there is still some risk involved. Make sure that the fund you choose has a securities with a strong credit rating, to avoid default risk, and a diversified portfolio. Additionally, fixed-income securities also carry an element of interest rate risk, which is the chance that a rise in interest rates in the economy will lower the value of the assets. The short maturities of money market means that interest rate risk is relatively low, but it is important for an investor to be aware of it.

The Bajaj Finserv Money Market Fund offered by Bajaj Finserv Asset Management Limited can be considered by investors seeking moderate returns and relatively lower risk over short-term horizons. This open-ended debt scheme aims to generate regular income through investments in money market instruments. It is suited for investors with an investment horizon of 6-12 months who are seeking liquidity and a relatively low-cost fixed income instrument. The fund is also suitable for portfolio diversification purposes. Click here for a detailed scheme information.

Conclusion

Money market funds offer liquidity, relative stability, and a modest return potential, making them a potentially suitable option for investors seeking to build an emergency fund. However, it's important to consider factors such as interest rates, liquidity, fees, and credit risk before investing. By doing your research and choosing the right fund, you can create a robust emergency corpus that can help you navigate unexpected expenses or emergencies. For building wealth over time, consider a disciplined investment approach through mutual fund SIPs. You can explore a one time SIP calculator to see how regular investments can grow your corpus.

FAQs

Is a money market fund good for emergency fund?

Yes, money market funds can be a suitable option for creating emergency funds due to their high liquidity and relatively lower risk profile.

How do money market funds differ from fixed deposits?

Money market funds are investments in short-term debt instruments, whereas a fixed deposit involves an individual putting money into a bank account to earn interest at a fixed rate. Money market funds offer higher liquidity than fixed deposits, where your funds are locked in for a pre-decided period. Moreover, you can make additional investment to your money market fund when needed, unlike in an FD. Also, the earnings on a money market fund are influenced by market movements, whereas an FD is a safer instrument and offers fixed returns.

What is the best way to build an emergency fund?

The best way to build an emergency fund is to start setting aside money regularly and consistently in an avenue that offers high liquidity. You may consider investing a money market fund or other low-risk investment options for this purpose and make sure to keep your emergency fund separate from your regular savings or checking account.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.