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Introduction
Emergencies don’t announce themselves—medical bills, job loss, urgent repairs can strike anytime. While keeping cash in a savings account is safe, it often earns minimal interest. That’s where Liquid Funds—a type of mutual fund—offer a smarter alternative for building your emergency corpus.
In this blog, we explain what an emergency fund is, how liquid funds work, and how one investor used them smartly during a crisis.18/06/2025
An emergency fund is a financial cushion for unforeseen expenses. Experts recommend saving 3–6 months of essential expenses in a place that is:
Liquid Funds invest in short-term debt instruments like treasury bills, commercial papers, and certificates of deposit with maturities up to 91 days. Returns: ~5%–6% annually (as of recent trends)
Access: Redeem money within 24 hours (T+1 day)
Risk: Low (but not zero—some volatility is possible)
Real-Life Example: Reema’s Smart Backup
Reema, a 35-year-old working mother, created an emergency fund of ₹1.5 lakhs in a liquid fund in early 2021. When her son had an unexpected hospitalization in mid-2022, she was able to redeem her units in the morning and receive funds by the next day.
Had she kept this in a savings account, she’d have earned ~3.5% annually. But thanks to the liquid fund, her corpus grew to ₹1.6 lakhs before withdrawal.
Key Takeaways
| Criteria | Savings Account | Liquid Fund |
|---|---|---|
| Liquidity | Instant | 1 business day (T+1) |
| Returns | ~3.5% | ~5%-6% |
| Risk Level | Almost zero | Low (debt market exposure) |
| Ideal Use | Short-term safety | Emergency corpus |
Conclusion
Liquid funds strike the perfect balance between safety, returns, and access. While they shouldn’t replace your health insurance or long-term planning tools, they’re a great fit for your emergency fund strategy.
Start small—create your emergency buffer in a liquid fund and stay prepared. Because peace of mind is priceless.
Summary Table: Emergency Fund via Liquid Funds
| Investment Option | Avg. Return (3-Yr) | Avg. Risk | Avg. Investor Behaviour |
|---|---|---|---|
| Savings Account | 3%-3.5% | Very Low | Passive, doesn't grow much |
| Liquid Funds | 5%-6% | Low | Active, withdrawal in need only |
| Fixed Deposits | 5%-6.5% | Low-Medium | Locked in, penalty for early exit |
Dr. Satish Vadapalli
Research Analyst
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