Emergency Fund: Experts Advise Six Month Safety Net Before Investments
Financial planners emphasise that the first step to financial security is creating an emergency fund, which is reserve kept aside to deal with unexpected expenses.
Published : March 7, 2026 at 10:14 AM IST
~By Saurabh Shukla
New Delhi: As the new financial year approaches, many people begin setting financial resolutions to protect their savings and strengthen their finances. However, in the absence of proper guidance and awareness, some investors end up choosing unsuitable investment plans that can erode their savings and even lead to losses.
To understand how individuals can safeguard their finances while ensuring stability and reasonable returns, ETV Bharat spoke with a few industry experts. They emphasised the importance of building a strong financial safety net before focusing on high-return investments like equity and quick return instruments, and long-term mutual funds.
According to financial planners first and most important step toward financial security is creating an emergency fund, which is a reserve kept aside to deal with unexpected expenses and financial disruptions. Experts say this simple but crucial step forms the foundation of sound financial planning. An emergency fund is simply a reserve of money kept aside to deal with sudden financial shocks.
These may include job loss, medical emergencies, urgent home repairs or other unforeseen expenses. Unlike long term investments, this money is meant to be easily accessible so that a household can continue meeting essential expenses even when income is disrupted.
Most financial advisers recommend keeping aside enough to cover three to six months of essential household expenses. Essential expenses typically include rent or home loan EMIs, groceries, utility bills, insurance premiums, school fees and minimum loan repayments. Discretionary spending, such as travel, entertainment and shopping, is usually not counted while calculating this amount. And most of the time, no one thinks of this kind of spending.
Head of Market Perspective and Research at Samco Securities, Apurva Sheth, told ETV Bharat that an emergency fund should be calculated based on monthly household expenses. 'If you multiply your monthly expenses by six, that is the amount you should ideally keep aside,' he said.
Adding that a six-month buffer helps deal with unforeseen situations. He also pointed out that certain financial steps should be taken as soon as a person starts earning. According to him, having a term insurance plan, health insurance, and an emergency fund is essential and should not be ignored. Only after putting these basic safeguards in place should people think about investing the money they save from their income.
According to experts, if a household spends about Rs 40,000 every month on essential needs, the recommended emergency reserve would range between Rs 1.2 lakh and Rs 2.4 lakh. The exact size of the fund, however, depends on several factors.
Research also suggests that income stability plays an important role in determining how large the fund should be. Individuals with stable and predictable income may feel comfortable with a smaller reserve, while those working in the private sector, startups or freelance professions often require a larger buffer because their income may fluctuate.
Also, households with a single earning member generally need a bigger cushion than those with two sources of income. Similarly, people who have financial dependents such as children, elderly parents or a non-working spouse are usually advised to maintain a larger emergency reserve.
Where the emergency fund money is kept is equally important. Financial experts stress that safety and liquidity should take priority over returns when choosing where to park emergency savings.
A portion of the fund can remain in a regular savings account for immediate access. The rest can be placed in relatively low-risk options such as liquid mutual funds or short-term deposit options, which typically offer slightly better returns while still allowing quick withdrawals.
Mutual fund expert Vijay Mantri told ETV Bharat that an emergency fund should always be kept in instruments that are safe and easy to access. According to him, an emergency fund is meant to meet urgent financial needs and should ideally cover about six months of essential expenses.
He pointed out that such money should be invested in debt instruments rather than equities. Investing emergency savings in the stock market can be risky because market fluctuations may reduce the value of the investment at the time the money is needed. For this reason, he said, debt mutual funds are a more suitable option for parking an emergency fund, he added.
Building an emergency fund can take time, particularly for younger earners who may already be managing loan repayments and other expenses. Financial planners often suggest creating the fund gradually by setting aside a fixed portion of income every month. Even small regular contributions can accumulate into a meaningful reserve over time. Once the desired amount has been built, the same savings can then be redirected toward long-term investments such as retirement funds or equity portfolios.
Experts also suggest that an emergency fund should be used only for genuine financial emergencies. If the reserve is used, it should ideally be replenished as soon as possible to restore financial protection.
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