The most appropriate ways to keep money ready for emergencies?

Question

Background info:
My financial planner advised investing money in debt funds, mutual funds as long term investments, where in case of an emergency for large amounts, I could withdraw from the debt funds (although to me, withdrawing from mutual funds seems more logical since there's no exit load and no tax to be paid after a specified amount of time).

However, for smaller amounts of money (two or three times my salary amount) needed for emergency, he advised having a recurring deposit into which I deposit a small amount every month and could liquidate at anytime (but I see there's a penalty for early withdrawal).

He also advised keeping in my savings account, some amount of money (approximately equal to my salary) un-invested.

My question:

• Is a recurring deposit really the best way to have small amounts of money for emergencies?

• Would the small monthly amounts be better invested in fixed deposits which can be liquidated during an emergency?

• The problem with withdrawing from the debt fund or mutual fund is that it can take anything from two to three days to get processed and the money to reach my savings account. Recurring and fixed deposit liquidation is instant.

Is there any other way to have emergency funds (don't say 'keep it in your socks in a drawer' :-) )? One of the other reasons I'm asking is because keeping two times my salary amount in my savings account uninvested, seems like a waste. I feel that money should be invested in a way that I can withdraw it instantly when I want.

Answer 1

Is a recurring deposit really the best way to have small amounts of money for emergencies?
Would the small monthly amounts be better invested in fixed deposits which can be liquidated during an emergency?

Recurring or Fixed deposits are equally good options. For short term, there is not much of gain/loss of one over other. It comes down to convenience.

The problem with withdrawing from the debt fund or mutual fund is that it can take anything from two to three days to get processed and the money to reach my savings account. Recurring and fixed deposit liquidation is instant.

Apart from time to get the funds [2-3 days], there is also risk, in short term a debt fund could lose value.

Answer 2

I think recurring deposit or fixed deposit cannot be a good place to keep your contingency amount. As you have correctly said, there is penalty for withdrawing earlier and moreover the tax burden on the interest you accrue.

A liquid or debt mutual fund has the same problem of penalty in the form of exit load and it has income tax in the form of capital gain tax. The tax is more if you redeem it before three years.

In my view, a savings bank account with relatively higher interest will serve the purpose. Digibank from DBS bank is giving 7% interest from Re 1 of your balance in the savings account. You can check with other banks also who can give you the same feature.