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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Personal Financial Planning

Ramesh, aged 30, has monthly expenses of Rs 40,000 and keeps an emergency fund covering 6 months of expenses. He holds the fund in a liquid fund. Which statement best describes the purpose and suitability of this fund?

An emergency fund exists to cover unexpected expenses or loss of income, so it should prioritise safety and liquidity over returns. Keeping it in a liquid fund suits this purpose, whereas equity or lock-in products may be unavailable or lower in value when needed.

  1. AIt is meant to meet unforeseen needs, so safety and liquidity matter more than returnsCorrect
  2. BIt is meant to maximise long-term growth, so equity is preferable
  3. CIt is meant to fund retirement, so a lock-in product is preferable
  4. DIt is meant to save tax, so an ELSS is preferable

Explanation

An emergency fund (here 6 x 40,000 = Rs 2,40,000) covers unexpected income loss or expenses. Hence capital safety and quick access take priority over return. Equity or lock-in products could be unavailable or fall in value when the money is needed.

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