Why an emergency fund isn’t for ‘making money’; how to keep yours truly liquid

An emergency fund is your financial safety net — money set aside to handle life’s unexpected events without derailing your long-term goals. Whether it’s a sudden job loss, medical emergency, or urgent home repair, having quick access to funds can mean the difference between staying afloat and falling into debt. Yet, many people unknowingly compromise this safety by chasing higher returns and locking their emergency money in risky or illiquid investments. The real purpose of an emergency fund isn’t growth — it’s stability and instant availability. Knowing where to park it can save you stress, losses, and unnecessary borrowing.

CA. Abhishek Walia, mentioning a case study, stated one of my clients had done everything by the book — or so it seemed. She’d built a six-month emergency fund worth ₹3 lakh, ensuring she could handle any financial shock without panic. But instead of keeping it accessible, she invested the entire sum in stocks and equity mutual funds.

Her reasoning was simple: why let the money sit idle in a low-interest account when markets could offer 12–15% returns? For months, this strategy seemed “smart” — until a sudden hospitalisation in her family turned theory into reality.

The problem? The market had dropped 12%. To free up money, she had to sell at a loss, pay a 1% exit load on some funds, and still wait 2–3 days for settlement. By the time the money actually reached her account, she had already borrowed from a friend to cover the bills.

This is the critical mistake many disciplined savers make: treating an emergency fund as an investment vehicle. The primary purpose of an emergency fund is not to generate high returns — it’s to provide instant liquidity and protect your capital. Once you park it in volatile, illiquid, or locked-in instruments, you’ve defeated the very reason it exists.

Where to keep your Emergency Fund

High-interest savings account: Zero risk, instant access.

Sweep-in fixed deposit (FD): Combines liquidity with slightly better returns.

Liquid mutual funds: Usually T+1 liquidity (money in your account the next working day) with low volatility.

Money market funds: Stable NAVs, short-term maturity instruments.

Golden Rule:
Returns from your emergency fund are a bonus, never the objective. If you can’t access 100% of it within 24 hours — without incurring losses or penalties — it’s not truly an emergency fund.

In short, think of your emergency fund as your financial fire extinguisher. You don’t buy one expecting it to make you money — you keep it so it’s ready when you need it, no matter what the markets are doing