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Building a Medical Emergency Fund Using Debt Mutual Funds

Updated on August 27, 2025 , 127 views

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.

 Building_a_Medical_Emergency_Fund_Using_Debt_Mutual_Funds

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.

Why a Medical Emergency Fund is Essential?

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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What Are Debt Mutual Funds?

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:

  • Liquid Funds: These invest in securities with a maturity of up to 91 days, making them highly liquid and relatively safe.
  • Ultra-short-term funds: Ideal for holding funds for a few months to a year, these provide slightly higher returns compared to liquid funds.
  • Short-Term Debt Funds: These invest in instruments with a maturity of 1 to 3 years and offer a balance between safety and returns.

Why Use Debt Mutual Funds for a Medical 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.

How to Build a Medical Emergency Fund Using Debt Mutual Funds

Step 1: Calculate Your Emergency Fund Needs

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.

Step 2: Choose the Right Type of Debt Fund

  • Liquid Funds for Immediate Access: If you want to access your funds immediately, liquid funds are the best option. They invest in short-term debt instruments and provide quick liquidity.
  • Ultra-Short-Term Funds for Slightly Higher Returns: If you have a moderate risk appetite and are looking to park your funds for a slightly longer period, ultra-short-term funds may be suitable.
  • Short-Term Debt Funds for Medium-Term Goals: If your medical emergency fund goal spans over a few years, short-term debt funds provide a good balance between risk and return.

Practical Example: Building an Emergency Fund

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.

Key Considerations When Using Debt Funds

  • 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.

Historical Perspective: Debt Funds in Uncertain Times

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.

Additional Tips for Managing Your Emergency Fund

  • Regular Review: Periodically review your fund to ensure it meets your financial needs, especially if your lifestyle or medical costs change.
  • Avoid Risky Investments: Your emergency fund should not be invested in high-risk assets like equity funds or stock markets, as the primary goal is to preserve capital.
  • Automate Your Investments: Setting up an automated SIP can help you consistently build your emergency fund without the hassle of manual transfers.

Best Debt Funds in India 2025

FundNAVNet Assets (Cr)3 MO (%)6 MO (%)1 YR (%)3 YR (%)2024 (%)Debt Yield (YTM)Mod. DurationEff. Maturity
Axis Credit Risk Fund Growth ₹21.6718
↓ -0.01
₹3671.44.88.67.687.81%1Y 11M 26D2Y 3M 29D
PGIM India Credit Risk Fund Growth ₹15.5876
↑ 0.00
₹390.64.48.43 5.01%6M 14D7M 2D
UTI Banking & PSU Debt Fund Growth ₹22.1725
↓ -0.01
₹8101.14.68.27.17.66.47%1Y 9M 11D2Y 11D
Aditya Birla Sun Life Savings Fund Growth ₹554.641
↑ 0.03
₹20,7951.747.97.47.96.6%5M 26D7M 2D
Aditya Birla Sun Life Money Manager Fund Growth ₹374.625
↑ 0.04
₹29,5151.74.17.97.57.86.17%5M 19D5M 19D
HDFC Corporate Bond Fund Growth ₹32.7428
↓ -0.03
₹35,9680.14.17.97.58.66.88%4Y 2M 12D6Y 9M 11D
HDFC Banking and PSU Debt Fund Growth ₹23.1776
↓ -0.01
₹5,9350.34.37.87.27.96.78%3Y 6M 7D5Y 1M 17D
Aditya Birla Sun Life Corporate Bond Fund Growth ₹113.433
↓ -0.16
₹28,59803.97.77.68.56.9%4Y 6M 11D6Y 10M 17D
ICICI Prudential Long Term Plan Growth ₹37.0259
↓ -0.07
₹15,051-0.13.87.57.68.27.32%3Y 8M 5D9Y 7M 6D
Indiabulls Liquid Fund Growth ₹2,548.77
↑ 0.39
₹3931.53.376.97.45.77%1M 10D1M 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

CommentaryAxis Credit Risk Fund PGIM India Credit Risk FundUTI Banking & PSU Debt FundAditya Birla Sun Life Savings FundAditya Birla Sun Life Money Manager FundHDFC Corporate Bond FundHDFC Banking and PSU Debt FundAditya Birla Sun Life Corporate Bond FundICICI Prudential Long Term PlanIndiabulls Liquid Fund
Point 1Bottom 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 2Established 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 3Top 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 4Risk 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 51Y 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 61M 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 7Sharpe: 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 8Information 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 9Yield 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 10Modified 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

  • Bottom quartile AUM (₹367 Cr).
  • Established history (11+ yrs).
  • Top rated.
  • Risk profile: Moderate.
  • 1Y return: 8.58% (top quartile).
  • 1M return: 0.44% (upper mid).
  • Sharpe: 2.44 (upper mid).
  • Information ratio: 0.00 (top quartile).
  • Yield to maturity (debt): 7.81% (top quartile).
  • Modified duration: 1.99 yrs (lower mid).

PGIM India Credit Risk Fund

  • Bottom quartile AUM (₹39 Cr).
  • Established history (10+ yrs).
  • Rating: 5★ (top quartile).
  • Risk profile: Moderate.
  • 1Y return: 8.43% (top quartile).
  • 1M return: 0.27% (upper mid).
  • Sharpe: 1.73 (lower mid).
  • Information ratio: 0.00 (top quartile).
  • Yield to maturity (debt): 5.01% (bottom quartile).
  • Modified duration: 0.54 yrs (upper mid).

UTI Banking & PSU Debt Fund

  • Lower mid AUM (₹810 Cr).
  • Established history (11+ yrs).
  • Rating: 5★ (upper mid).
  • Risk profile: Moderate.
  • 1Y return: 8.17% (upper mid).
  • 1M return: 0.22% (lower mid).
  • Sharpe: 1.86 (upper mid).
  • Information ratio: 0.00 (upper mid).
  • Yield to maturity (debt): 6.47% (lower mid).
  • Modified duration: 1.78 yrs (upper mid).

Aditya Birla Sun Life Savings Fund

  • Upper mid AUM (₹20,795 Cr).
  • Established history (22+ yrs).
  • Rating: 5★ (upper mid).
  • Risk profile: Moderately Low.
  • 1Y return: 7.94% (upper mid).
  • 1M return: 0.45% (upper mid).
  • Sharpe: 3.76 (top quartile).
  • Information ratio: 0.00 (upper mid).
  • Yield to maturity (debt): 6.60% (lower mid).
  • Modified duration: 0.49 yrs (upper mid).

Aditya Birla Sun Life Money Manager Fund

  • Top quartile AUM (₹29,515 Cr).
  • Established history (19+ yrs).
  • Rating: 5★ (upper mid).
  • Risk profile: Low.
  • 1Y return: 7.89% (upper mid).
  • 1M return: 0.47% (top quartile).
  • Sharpe: 3.35 (top quartile).
  • Information ratio: 0.00 (upper mid).
  • Yield to maturity (debt): 6.17% (bottom quartile).
  • Modified duration: 0.47 yrs (top quartile).

HDFC Corporate Bond Fund

  • Highest AUM (₹35,968 Cr).
  • Established history (15+ yrs).
  • Rating: 5★ (lower mid).
  • Risk profile: Moderately Low.
  • 1Y return: 7.85% (lower mid).
  • 1M return: -0.31% (bottom quartile).
  • Sharpe: 1.46 (bottom quartile).
  • Information ratio: 0.00 (lower mid).
  • Yield to maturity (debt): 6.88% (upper mid).
  • Modified duration: 4.20 yrs (bottom quartile).

HDFC Banking and PSU Debt Fund

  • Lower mid AUM (₹5,935 Cr).
  • Established history (11+ yrs).
  • Rating: 5★ (lower mid).
  • Risk profile: Moderately Low.
  • 1Y return: 7.79% (lower mid).
  • 1M return: -0.16% (lower mid).
  • Sharpe: 1.31 (bottom quartile).
  • Information ratio: 0.00 (lower mid).
  • Yield to maturity (debt): 6.78% (upper mid).
  • Modified duration: 3.52 yrs (lower mid).

Aditya Birla Sun Life Corporate Bond Fund

  • Upper mid AUM (₹28,598 Cr).
  • Oldest track record among peers (28 yrs).
  • Rating: 5★ (bottom quartile).
  • Risk profile: Moderately Low.
  • 1Y return: 7.73% (bottom quartile).
  • 1M return: -0.39% (bottom quartile).
  • Sharpe: 1.54 (lower mid).
  • Information ratio: 0.00 (bottom quartile).
  • Yield to maturity (debt): 6.90% (upper mid).
  • Modified duration: 4.53 yrs (bottom quartile).

ICICI Prudential Long Term Plan

  • Upper mid AUM (₹15,051 Cr).
  • Established history (15+ yrs).
  • Rating: 5★ (bottom quartile).
  • Risk profile: Moderate.
  • 1Y return: 7.49% (bottom quartile).
  • 1M return: -0.66% (bottom quartile).
  • Sharpe: 1.53 (bottom quartile).
  • Information ratio: 0.00 (bottom quartile).
  • Yield to maturity (debt): 7.32% (top quartile).
  • Modified duration: 3.68 yrs (bottom quartile).

Indiabulls Liquid Fund

  • Bottom quartile AUM (₹393 Cr).
  • Established history (13+ yrs).
  • Rating: 5★ (bottom quartile).
  • Risk profile: Low.
  • 1Y return: 6.98% (bottom quartile).
  • 1M return: 0.47% (top quartile).
  • Sharpe: 3.05 (upper mid).
  • Information ratio: -1.37 (bottom quartile).
  • Yield to maturity (debt): 5.77% (bottom quartile).
  • Modified duration: 0.11 yrs (top quartile).
*List of top performing debt funds in India

Conclusion

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.

Disclaimer:
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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