Medical emergencies can be both emotionally and financially draining. The best way to safeguard yourself and your loved ones against unexpected medical expenses is by having a well-planned emergency fund.
While traditional savings accounts are commonly used for this purpose, they may not provide sufficient returns to beat Inflation. This is where debt Mutual Funds come into the picture. Debt funds offer a combination of stability and liquidity, making them an excellent option for building a medical emergency fund.
A medical emergency can strike at any time and can lead to significant expenses. This could include hospital bills, surgery costs, or long-term treatments. Having an emergency fund ensures that you don't have to dip into your long-term investments or take on debt to cover these costs. According to financial experts, an emergency fund should ideally cover 6 to 12 months of your monthly expenses, including rent, groceries, utility bills, and especially unforeseen medical costs.
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Debt mutual funds invest in fixed-Income securities like government Bonds, corporate bonds, treasury bills, and money market instruments. These funds are generally less risky than Equity Funds and offer a predictable return. They are well-suited for short to medium-term investment goals, such as creating an emergency fund.
Types of Debt Mutual Funds Suitable for an Emergency Fund:
Liquidity: The most critical aspect of an emergency fund is easy access to your money. Debt funds like liquid and ultra-short-term funds allow you to redeem your investments quickly, usually within one working day.
Better Returns than Savings Accounts: While a traditional Savings Account provides an annual interest rate of around 2.5% to 4%, debt funds can yield returns between 5% and 7%, helping you combat inflation.
Low Volatility: Debt funds are less volatile compared to equity funds, making them a safer option for emergency funds.
Tax Efficiency: If held for more than three years, debt mutual funds offer the advantage of indexation benefits, reducing the Tax Liability on your gains.
Start by estimating your medical emergency expenses. Consider costs like hospital stays, medication, and post-treatment care. If you think a medical emergency could cost ₹5 lakh, aim to accumulate at least this amount.
Let’s assume Rajesh wants to build a medical emergency fund of ₹5 lakh over the next three years. Here’s how he can do it:
Investment in Liquid Funds: Rajesh decides to invest a lumpsum of ₹4 lakh in a liquid fund yielding an Average Return of 5.5% per annum. At the end of three years, his investment will grow to approximately ₹4.67 lakh.
Monthly SIP in Ultra-Short-Term Funds: To reach his target of ₹5 lakh, Rajesh starts a SIP of ₹3,000 per month in an ultra-short-term Debt fund, with an average return of 6%. After three years, his SIP will accumulate to approximately ₹1.16 lakh.
By combining both strategies, Rajesh would have an emergency fund totaling approximately ₹5.83 lakh, giving him a safety net well above his initial target.
Exit Load and Redemption Time: While liquid funds generally don’t have an exit load, some ultra-short-term and short-term debt funds might. Check the fund’s terms before Investing.
Tax Implications: Gains from debt mutual funds are taxable. If sold within three years, they are taxed as short-term Capital gains, which are added to your income and taxed at your applicable slab rate. For investments held longer, gains are taxed at 20% with indexation benefits.
Risk Factors: Although debt funds are safer than equity funds, they are not entirely risk-free. Interest rate fluctuations and credit risks can impact returns.
Debt mutual funds have proven to be reliable during financial uncertainties. For example, during Market downturns, investors who had parked their emergency funds in liquid or ultra-short-term debt funds were able to access their money without worrying about significant losses. This highlights the importance of having a stable and liquid investment option for emergencies.
Fund NAV Net Assets (Cr) 3 MO (%) 6 MO (%) 1 YR (%) 3 YR (%) 2024 (%) Debt Yield (YTM) Mod. Duration Eff. Maturity Axis Credit Risk Fund Growth ₹21.6718
↓ -0.01 ₹367 1.4 4.8 8.6 7.6 8 7.81% 1Y 11M 26D 2Y 3M 29D PGIM India Credit Risk Fund Growth ₹15.5876
↑ 0.00 ₹39 0.6 4.4 8.4 3 5.01% 6M 14D 7M 2D UTI Banking & PSU Debt Fund Growth ₹22.1725
↓ -0.01 ₹810 1.1 4.6 8.2 7.1 7.6 6.47% 1Y 9M 11D 2Y 11D Aditya Birla Sun Life Savings Fund Growth ₹554.641
↑ 0.03 ₹20,795 1.7 4 7.9 7.4 7.9 6.6% 5M 26D 7M 2D Aditya Birla Sun Life Money Manager Fund Growth ₹374.625
↑ 0.04 ₹29,515 1.7 4.1 7.9 7.5 7.8 6.17% 5M 19D 5M 19D HDFC Corporate Bond Fund Growth ₹32.7428
↓ -0.03 ₹35,968 0.1 4.1 7.9 7.5 8.6 6.88% 4Y 2M 12D 6Y 9M 11D HDFC Banking and PSU Debt Fund Growth ₹23.1776
↓ -0.01 ₹5,935 0.3 4.3 7.8 7.2 7.9 6.78% 3Y 6M 7D 5Y 1M 17D Aditya Birla Sun Life Corporate Bond Fund Growth ₹113.433
↓ -0.16 ₹28,598 0 3.9 7.7 7.6 8.5 6.9% 4Y 6M 11D 6Y 10M 17D ICICI Prudential Long Term Plan Growth ₹37.0259
↓ -0.07 ₹15,051 -0.1 3.8 7.5 7.6 8.2 7.32% 3Y 8M 5D 9Y 7M 6D Indiabulls Liquid Fund Growth ₹2,548.77
↑ 0.39 ₹393 1.5 3.3 7 6.9 7.4 5.77% 1M 10D 1M 11D Note: Returns up to 1 year are on absolute basis & more than 1 year are on CAGR basis. as on 29 Aug 25 Research Highlights & Commentary of 10 Funds showcased
Commentary Axis Credit Risk Fund PGIM India Credit Risk Fund UTI Banking & PSU Debt Fund Aditya Birla Sun Life Savings Fund Aditya Birla Sun Life Money Manager Fund HDFC Corporate Bond Fund HDFC Banking and PSU Debt Fund Aditya Birla Sun Life Corporate Bond Fund ICICI Prudential Long Term Plan Indiabulls Liquid Fund Point 1 Bottom quartile AUM (₹367 Cr). Bottom quartile AUM (₹39 Cr). Lower mid AUM (₹810 Cr). Upper mid AUM (₹20,795 Cr). Top quartile AUM (₹29,515 Cr). Highest AUM (₹35,968 Cr). Lower mid AUM (₹5,935 Cr). Upper mid AUM (₹28,598 Cr). Upper mid AUM (₹15,051 Cr). Bottom quartile AUM (₹393 Cr). Point 2 Established history (11+ yrs). Established history (10+ yrs). Established history (11+ yrs). Established history (22+ yrs). Established history (19+ yrs). Established history (15+ yrs). Established history (11+ yrs). Oldest track record among peers (28 yrs). Established history (15+ yrs). Established history (13+ yrs). Point 3 Top rated. Rating: 5★ (top quartile). Rating: 5★ (upper mid). Rating: 5★ (upper mid). Rating: 5★ (upper mid). Rating: 5★ (lower mid). Rating: 5★ (lower mid). Rating: 5★ (bottom quartile). Rating: 5★ (bottom quartile). Rating: 5★ (bottom quartile). Point 4 Risk profile: Moderate. Risk profile: Moderate. Risk profile: Moderate. Risk profile: Moderately Low. Risk profile: Low. Risk profile: Moderately Low. Risk profile: Moderately Low. Risk profile: Moderately Low. Risk profile: Moderate. Risk profile: Low. Point 5 1Y return: 8.58% (top quartile). 1Y return: 8.43% (top quartile). 1Y return: 8.17% (upper mid). 1Y return: 7.94% (upper mid). 1Y return: 7.89% (upper mid). 1Y return: 7.85% (lower mid). 1Y return: 7.79% (lower mid). 1Y return: 7.73% (bottom quartile). 1Y return: 7.49% (bottom quartile). 1Y return: 6.98% (bottom quartile). Point 6 1M return: 0.44% (upper mid). 1M return: 0.27% (upper mid). 1M return: 0.22% (lower mid). 1M return: 0.45% (upper mid). 1M return: 0.47% (top quartile). 1M return: -0.31% (bottom quartile). 1M return: -0.16% (lower mid). 1M return: -0.39% (bottom quartile). 1M return: -0.66% (bottom quartile). 1M return: 0.47% (top quartile). Point 7 Sharpe: 2.44 (upper mid). Sharpe: 1.73 (lower mid). Sharpe: 1.86 (upper mid). Sharpe: 3.76 (top quartile). Sharpe: 3.35 (top quartile). Sharpe: 1.46 (bottom quartile). Sharpe: 1.31 (bottom quartile). Sharpe: 1.54 (lower mid). Sharpe: 1.53 (bottom quartile). Sharpe: 3.05 (upper mid). Point 8 Information ratio: 0.00 (top quartile). Information ratio: 0.00 (top quartile). Information ratio: 0.00 (upper mid). Information ratio: 0.00 (upper mid). Information ratio: 0.00 (upper mid). Information ratio: 0.00 (lower mid). Information ratio: 0.00 (lower mid). Information ratio: 0.00 (bottom quartile). Information ratio: 0.00 (bottom quartile). Information ratio: -1.37 (bottom quartile). Point 9 Yield to maturity (debt): 7.81% (top quartile). Yield to maturity (debt): 5.01% (bottom quartile). Yield to maturity (debt): 6.47% (lower mid). Yield to maturity (debt): 6.60% (lower mid). Yield to maturity (debt): 6.17% (bottom quartile). Yield to maturity (debt): 6.88% (upper mid). Yield to maturity (debt): 6.78% (upper mid). Yield to maturity (debt): 6.90% (upper mid). Yield to maturity (debt): 7.32% (top quartile). Yield to maturity (debt): 5.77% (bottom quartile). Point 10 Modified duration: 1.99 yrs (lower mid). Modified duration: 0.54 yrs (upper mid). Modified duration: 1.78 yrs (upper mid). Modified duration: 0.49 yrs (upper mid). Modified duration: 0.47 yrs (top quartile). Modified duration: 4.20 yrs (bottom quartile). Modified duration: 3.52 yrs (lower mid). Modified duration: 4.53 yrs (bottom quartile). Modified duration: 3.68 yrs (bottom quartile). Modified duration: 0.11 yrs (top quartile). Axis Credit Risk Fund
PGIM India Credit Risk Fund
UTI Banking & PSU Debt Fund
Aditya Birla Sun Life Savings Fund
Aditya Birla Sun Life Money Manager Fund
HDFC Corporate Bond Fund
HDFC Banking and PSU Debt Fund
Aditya Birla Sun Life Corporate Bond Fund
ICICI Prudential Long Term Plan
Indiabulls Liquid Fund
Building a medical emergency fund using debt mutual funds is a wise strategy for financial security. The key lies in selecting the right type of debt fund based on your time horizon and liquidity needs. By investing in liquid or ultra-short-term funds, you can ensure that your money is easily accessible and growing at a rate that outpaces inflation. Start planning today and secure your future against unforeseen medical emergencies.