Goalwise Grapple - Emergency Fund vs Fixed Deposit


Financial freedom is a fruit very few people get to taste. Bankers will tell you that the best way to achieve that degree of freedom is by investing in a Fixed Deposit (FD) but you will be wise to take their words with a pinch of salt.

Most banks will urge you to stash your money in an FD, saying it will give you a good interest rate and market fluctuations will not affect your investment. However, it may not be the most favourable option you have, especially if you want to take out some cash for any unforeseen emergencies.

At Goalwise, we insist that our investors plan their finances better and save for a rainy day before they should end up taking out bank loans to cover their emergency expenses. With an emergency fund, you can have some of your money parked aside, available to you at the click of a button.

Return on Investment

When it comes to returns, you can expect anywhere between 6.5-8% on both, emergency fund and FDs depending on the prevailing interest rates.

Although FDs provide you a fixed interest throughout your investment journey, some people are forced to empty their savings for various reasons. If you’re over the age of 60, banks usually throw in an additional 0.5% interest for being a privileged senior citizen. Emergency fund gives you a similar rate of interest for short-term and ultra short-term periods. But unlike FDs, you don’t have to shell out a penalty fee when you break your savings.

An Emergency fund will give you higher after tax returns if you’re invested for over 3 years (gains will be taxed as long term capital gains) whereas FD interest will always be taxed at your income tax level i.e. if you are in the 30% tax bracket, you will have to pay 30% of your interest income as tax.

Banks will also deduct 10% on the interest as TDS while in an emergency fund there is no TDS, even on withdrawal.

Flexibility

Fixed Deposits come with a lock-in period and will cost you some penalty if you want to withdraw before it has reached its date of maturity. Furthermore, you can’t make partial withdrawals from your FD where as an emergency fund will give you an option to take out smaller amounts of money that too without any penalty.

In the case of an emergency fund, the money that you have parked can be encashed for medical or any other emergencies. Be it paying for your home repairs or even getting a new set of wheels for your car, you can rest assured that you have a liquid fund, ready to relieve you of your imminent woes. Call it a failsafe if you will, but the fact that you can withdraw your money at a moment’s notice, even on bank holidays, is just a horse you want to bet on.

Risk Factor

Emergency fund has the lowest risk amongst all Mutual Funds and is almost as safe as an FD. It works well as a cushion to land on during your financial falls.

Generally, we suggest saving upto 4-6 months of your living expenses to cover your rent, EMIs, groceries and travel costs.

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Whether you’re a seasoned investor or just starting your first SIP, you would want to consider each of these factors carefully before investing. No one size fits all and it is our responsibility to help you choose the financial plan that is right for you.

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