Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
28 FEBRUARY, 2023
Abhirath Vaswani (a fictional character), 35 years old, has had to take a pay-cut at his job recently. He is suddenly under a lot of pressure as he has to handle multiple responsibilities at home. He has a wife and two children, and also sends money to his parents every month. While his job is safe, he knows it will be 2021 before the pay-cut is reversed. However, he is able to sustain his lifestyle with minimal worries because he has been building an emergency fund for himself over a decade now, on the advice of his bank’s Relationship Manager (RM).
One of the first things that a financially prudent individual must do is to create an emergency fund for themselves. An emergency fund is a fund that takes care of all expenses that an individual has to account for, for 3-6 months. This includes rent, EMI (equated monthly instalments), children’s education fees, utility bills, insurance premiums, medical expenses and groceries.
If you have children or old parents, it is always advisable to have an emergency fund that can sustain all of you for 12-18 months. In the case of a medical emergency, there is a chance that health insurance might not cover all the expenses. This fund will help you tide over. The emergency fund also takes care of your family expenses if you suddenly lose your job or have to take a pay-cut.
Abhirath kept some of his funds in fixed deposits with his bank and arbitrage funds. While the interest rates that Abhirath gets are not very high, he knows he can access cash quickly with a couple of clicks using Net/Mobile Banking.
The remainder of the corpus was invested into conservative debt hybrid funds. These funds are for an investment .this financial instrument because he knew that he will not be accessing this on a regular basis. He wanted to grow his wealth at a higher rate than the fixed interest rates available but also didn’t want to invest in instruments with high risk. Debt hybrid funds are also one of the suitable
Conservative debt hybrid funds generally invest 75%-90% of their portfolio in debt instruments like government bonds, corporate debentures and treasury bills. The balance 10%-25% of the portfolio is invested in stocks that are expected to deliver better returns than traditional saving instruments. Maximum equity exposure at any point in time is restricted to 25%.
Here are two funds that Abhirath has been investing in since the last 10 years:
Source: MFI Explorer | Data as on 28th February 2023
When you take a look at these figures, you realize how smart Abhirath has been. His emergency fund is not meant to fund his retirement or to help him buy a house. It exists to help him when he really needs money. What Abhirath has done is that he has ensured his money doesn’t stay idle. He protects his downside risk with the high debt component of these funds (both funds have around 75%-76% of their portfolio in debt instruments), and the equity component of these funds help him tap the upside gains.
His returns here are better than the standard returns that one would get from financial deposits. Take a leaf out of his book and visit your finance professional at your bank as quick as possible. You may want to consider debt hybrid funds as you start building your emergency fund.
Mutual fund investments are subject to market risks, read all scheme related documents carefully. AMFI Registration Number (ARN) 1390. Please read the offer document carefully before investing. The calculator is only an illustration, to demonstrate the concept of compounding/investing and should not be constructed as a promise, guarantee or a forecast of any minimum returns or future returns. Kotak Mahindra Bank does not assure any safeguard of capital and investments through SIP, does not guarantee or assure any protection against loses.
This Article is for information purpose only and should not be construed to be investment advice under SEBI (Investment Advisory) Regulations. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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