Reserve fund: Meaning, Types, Purpose and Benefits

Unexpected expenses are a part of life. These could range from medical bills or the loss of a job to sudden travel or urgent repairs. These are moments when having some extra money saved aside can be of immense help. That’s where a reserve fund comes into the picture.

Think of a reserve fund as your financial cushion for times when things don’t go as planned. Whether you’re an individual, a business owner, or someone investing in mutual funds, understanding what a reserve fund is and how to build one can help reduce stress during financial emergencies.

In this article, we’ll take a closer look at the reserve fund meaning, its purpose, its types, how it works, and why it is advisable to have one.

• Table of contents

• What is a reserve fund?
• Purpose of a reserve fund
• Types of reserve funds
• What are the objectives of a reserve fund?
• How does a reserve fund work?
• Things to keep in mind when setting up a reserve fund

What is a reserve fund?

A reserve fund is money that you set aside for emergencies or special needs in the future. Such a fund is different from your regular savings or investments – it’s an extra pool of money that you keep untouched unless you face a genuine emergency. This fund gives you the peace of mind that you have something to fall back on if anything goes wrong.
So, in summary, the meaning of a reserve fund is quite straightforward-–it’s a financial backup that you build over time.

Purpose of a reserve fund

You may wonder what the purpose of a reserve fund is. Life is full of surprises, and not all of them are pleasant. Having a financial cushion gives you a degree of stability to deal with these unforeseen events. Here are some key reasons that highlight the purpose of a reserve fund:

• To handle emergencies like job loss, health issues, or car repairs.
• To manage unexpected expenses like appliance breakdowns or urgent travel.
• To avoid debt during a crisis by not relying on credit cards or loans.
• To potentially have financial stability during tough times.
• To support important but irregular needs like festival spending.
• For businesses to continue operations even when income is low.

A reserve fund can act like a financial safety net, giving you some control when life takes a sudden turn.

Also Read: How to Invest in Liquid Funds – A Complete Guide

Types of reserve funds

There are different types of reserve fund, depending on who is using it and why. Let’s take a look at a few common ones:

1. Personal reserve fund: This is for individuals and families. It’s your emergency money for health issues, job loss, etc.
2. Corporate reserve fund: Businesses use this to deal with unexpected losses, slow sales, or future investments.
3. Housing society reserve fund: In housing societies or apartments, a reserve fund is kept aside for building repairs, maintenance, or legal issues.
4. Government reserve fund: Governments also keep a reserve for emergencies like natural disasters or economic slowdowns.
5. Mutual fund reserve: Mutual funds often hold a cash reserve to meet sudden redemption requests or to navigate market fluctuations.

What are the objectives of a reserve fund?

Here’s what it aims to do:

• Prepare for emergencies: It reduces worry about finances when something goes wrong.
• Encourage financial discipline: Regularly saving helps build a strong habit.
• Help with planning: You can focus on long-term goals without worrying about sudden expenses.
• Support smooth operations (for businesses and societies): Funds are available when needed, avoiding delays or losses.

How does a reserve fund work?

• Decide the amount: Experts suggest saving at least 3 to 6 months’ worth of expenses.
• Start small: Even saving a little each month adds up over time.
• Keep it separate: Don’t mix it with your regular savings or daily-use account.
• Invest wisely: The fund should be easily accessible and kept in stable avenues such as a savings account or low/low-to-moderate risk options like overnight mutual funds and liquid funds.

If you are looking to invest in mutual funds, some liquid or short-term debt funds can act as your reserve fund. They offer better potential return than a regular savings account, are relatively stable and are easy to access when you need the funds.

Things to keep in mind when setting up a reserve fund

Here are a few things to remember when you start building your reserve fund:

• Accessibility is key: You must be able to withdraw the money quickly if needed.
• Avoid high-risk investments: This is not the place to take chances.
• Review regularly: Your needs might change, so update your target amount about once a year.
• Stay disciplined: Don’t dip into the fund unless it’s truly an emergency.
• Keep it separate: Having a different bank account helps you track it better.

Also Read: An Essential Guide and Strategy for Building an Emergency Fund

Conclusion

A reserve fund is more than just a financial tool; it offers peace of mind. Whether you’re saving for yourself, your family, your business, or even a future goal, this fund acts like a safety net. It helps you navigate emergencies, avoid unnecessary loans and create a well-planned financial strategy. Even if you’re investing in mutual funds or other products, don’t ignore the importance of having a simple, easily available reserve fund. Start small, be regular, and stay committed.

FAQs:

Why should you set up a reserve fund?

To stay financially prepared for emergencies and avoid stress during unexpected situations. It helps you manage without taking loans or breaking long-term investments.

Can I invest money for a reserve fund?

Yes, you can either keep the money in a savings account (preferably, one that is different from the account you use for your regular expenses) or invest it in lower-risk and liquid options such as liquid mutual funds or overnight funds. Avoid risky investments, as you might need the money anytime, so the invested capital needs to be relatively stable.

Should only individuals have a reserve fund?

No. Everyone, including individuals, families, businesses, and housing societies, can benefit from a reserve fund. It’s a way to stay ready for sudden expenses.

How frequently should I contribute to my reserve fund?

It is advisable to contribute regularly (such as monthly, for a salaried professional), even if it’s a small amount. Consistency matters more than the amount.

Do I need to have a separate account to hold my reserve funds?

Yes, keeping it in a separate bank or investment account helps you avoid spending it accidentally and makes tracking easier.