Investor Q&A: What is the difference between Emergency Fund and Smarter Savings?

Q. I want to know the difference between:
Liquid Fund under Emergency Fund goal,
Debt funds under Smarter Savings goal, and
Debt funds in my Wealth goal.

A. The basic difference between these debt funds is the maturity duration of bonds they invest in. When you buy any bond that has a long duration, there's more risk of default in repayment. Shorter duration debt securities that matures sooner will have lesser risk. This risk is known as duration risk.

Liquid fund under Emergency Fund goal

Liquid funds are also a category of debt funds that invest in very short term loans or bonds. The maturity of these securities is generally less than 3 months.

This doesn't mean that you cannot invest in these funds for more than 3 months. The buying and selling of the securities happen at the fund level. So if you have invested your money in liquid funds, the money will remain invested and continue to grow till you manually redeem it.

The risk involved in these type of funds is very low because the duration of the underlying securities is very short (less than 3 months) hence they offer slightly lesser returns than the other category of debt funds.

Purpose of this goal is to park some money for your emergency needs which can arise anytime. By recommending Liquid funds we make sure that you are taking almost negligible risk and at the same time you have high liquidity.

The amount is credited in your account in upto 1 business day and the fund that we recommend also has a instant redemption facility. So the amount upto 90% of the invested amount or Rs. 50K, whichever is lower is credited instantly and the rest in upto 1 business day.

Debt funds under Smarter Savings goal

Under this goal we recommend Low and Ultra Short duration Debt funds. That is, the duration of the underlying securities is less than 1 year. The risk is still very low but slightly higher than Liquid funds so the returns are also slightly higher (about 0.5%).

This goal is recommended if you are planning to make a general investment for less than 3 years or if you are looking for an alternative to FD.

The major difference between Smarter Savings and Emergency fund goal is the speed of withdrawal. Under liquid funds you can withdraw the money and it gets credited in upto 1 business day and with Debt funds under Smarter Savings goal it takes upto 3 business days. You can withdraw from these funds too anytime you want. There's no exit load penalty on the debt funds that we recommend.

Debt funds under Wealth Goal

We recommend the same funds here as in Smarter Savings (but only 2 out of 3).