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

Which of the following best describes the main purpose of an emergency fund in a personal financial plan?

An emergency fund exists to cover unforeseen expenses or a loss of income without forcing the client to sell long-term investments at a bad time. It is kept in liquid, safe instruments, so it is not meant for maximising returns, saving tax or discretionary spending.

  1. ATo maximise long-term equity returns
  2. BTo meet unforeseen expenses or income loss without liquidating long-term investmentsCorrect
  3. CTo reduce income tax liability under Section 80C
  4. DTo fund discretionary purchases such as luxury goods

Explanation

An emergency fund is a liquid reserve, commonly three to six months of expenses, held in safe, easily accessible instruments. It protects long-term goals from disruption when unexpected needs or job loss occur. It is not a return-maximising or tax-saving tool.

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