An emergency fund also known as a contingency fund covers unprecedented crisis and unexpected expenses. A perfect emergency fund should also provide better liquidity options, the safety of investment, and growth that is decent enough to support your regular expenses and lifestyle.
If we consider all these factors, a fixed deposit will prove to be an ideal instrument for building an emergency fund. Let us understand why you should use FD investment for building a contingency fund:
Stability
The stability of the investment is a key factor as you don’t want to lose your savings when the unemployment rate is high and pay cuts have become a norm.
A fixed deposit scheme is a safe bet in this scenario as your savings will grow at a fixed rate without getting affected by market fluctuations.
Liquidity
If you are unable to withdraw your emergency funds quickly, there is hardly any meaning to it. Fixed deposits can be withdrawn prematurely but you can lose some interest that your deposits had accumulated in the form of penalty. The deposits cannot be withdrawn before completion of the minimum lock-in period in many cases.
The penalty can be between 1 or 2% depending on the financier. Some NBFCs like Bajaj Finance allow you to withdraw your deposited amount provided that it has been locked in for 3 months or more from the date of deposit.
Also, you no longer have to break your FD as you can get a loan by using your FD as collateral. Bajaj Finance FD enables you to apply for 75% of the maturity value as a loan. This could provide you with the necessary funds in times of crisis.
Growth
Fixed deposits grow at a steady rate and the returns are much more than other fixed-income instruments like savings schemes or recurring deposits.
However, the RBI has been decreasing the repo rates to bring more liquidity in the market. This has led to a decrease in FD interest rates as most banks have reduced their interest rates.
As a result, the bank FDs will only provide an interest rate between 4% and 6% depending on the tenor, FD type, and other factors. To continue growing your deposits at the same rate, you can deposit in a company FD that is offering a higher interest rate.
For example, Bajaj Finance Fixed Deposit is providing interest rates up to 7.35%. This high FD rate ensures that the deposits that you intend to use as an emergency fund in the future grow at a steady rate as well.
To find how this additional FD rate can influence the growth of your savings, you can use an FD calculator. You can also use an FD maturity calculator if you don’t know how to calculate FD interest rate perfectly.
The options like choosing a flexible tenor from 12 to 60 months and the facility to open multiple FD accounts of varying tenors and types with one cheque, make it a perfect instrument for building an emergency fund.
Having an emergency or backup fund to cover an unexpected event or crisis is a must especially in today’s testing times where the economy is going through an all-time low. Fixed deposit in India proves to be an ideal instrument to create a backup fund as they not only provide high returns but are also stable. However, since the bank FD rates have been reduced, you can deposit your savings in company FDs like Bajaj Finance FD that is offering interest rates up to 7.35%. To build an emergency fund you would need to calculate your returns in advance. You also get a 0.10% extra FD rate on using an online FD form to open a fixed deposit account.
