Are You Holding a Sufficient Contingency Fund Amid Volatile Equity Markets?

And more recently, the global climate has grown even more unpredictable with the return of Donald Trump to the presidency.

[Read: Equity Markets Crash Amid Trump's Tariff Wars: What Should Mutual Fund Investors Do Now]

With Trump's second term, has come the renewed wave of protectionist policies that unsettle global trade equations, and the Indian equity markets are not immune. Donald Trump's second term commonly referenced as Trump 2.0, has ever since, ushered in just hostile and aggressive 'America First policies.

The ink is hardly dry on his proposals for high import tariffs, domestic manufacturing bolstering, and tougher visa norms before they have upset trade partners across the globe.

For India, especially sectors like IT, pharma, and auto ancillaries that rely heavily on U.S. exports, the impact could be disruptive. Investors have taken note, leading to early market pullbacks.

The uncertainty is also affecting global capital flows, and FIIs are becoming increasingly cautious. Indian equity markets, which had so far shown resilience, are now witnessing heightened volatility and mood swings tied to global developments.

Against this backdrop, policy shifts in the U.S. could trigger job losses, lower demand, and financial stress across economies. In such a climate, individuals need to stay prepared. Building a robust contingency fund isn't just smart-it's essential.

This macroeconomic shake-up can affect every Indian household-either through job losses, reduced salaries, or slower business growth. In such times, a contingency fund acts like your financial airbag.

If you are an Indian investor with a high exposure to equities, now is the time to ask yourself: Do I have a sufficient contingency fund to weather a financial storm?

Why a Contingency Fund Is Your Lifeline

A contingency or emergency fund is a reserve of liquid money set aside to cover unforeseen expenses or income loss. While investing in equities for long-term wealth creation is important, having liquid assets to support you during tough times is non-negotiable.

Common Life Situations When You May Need It:

• Job loss or salary cuts

• Unexpected medical emergencies not covered by insurance

• Emergency travel

• Business loss or shutdown

• Repairing house/car damages

• Family emergencies

During volatile markets and economic downturns, it's not just the returns from your equity investments that get impacted your entire financial stability could be at stake.

How Much Emergency Corpus Is Enough?

The rule of thumb for building a contingency fund is:

12 to 18 months of your essential monthly expenses, including loan EMIs, rent, insurance premiums, and other unavoidable outflows. Let's break this down with an example:

Suppose your monthly household expenses are Rs 20,000 and you pay an additional Rs 30,000 in EMIs (home loan + car loan).

Total monthly outflow: Rs 50,000

12 months of expenses: Rs 6,00,000

18 months of expenses: Rs 9,00,000

You should aim to keep at least Rs 6 lakhs and ideally Rs 9 lakhs in highly liquid or low-risk investments. This amount ensures that even if your income stops tomorrow, you will have enough cushion to manage your life smoothly for at least a year.

Where Should You Invest Your Contingency Fund?

A contingency fund is not meant to generate high returns. It is meant to provide safety, liquidity, and capital preservation. Therefore, equity mutual funds, and stocks, are not suitable for this purpose.

Here are the best places to park your emergency corpus:

1. Liquid Mutual Funds

• Short-term debt papers (mainly treasury bills) with an average maturity of 91 days

• Better returns than savings accounts (historically 5%-7%)

• Instant redemption options available up to Rs 50,000 per day in some funds

• Ideal for slightly higher returns with capital preservation

[Read: Liquid Funds: A Worthy Choice to Park Money for the Short-Term Amid Volatile Equity Market]

2. Bank Fixed Deposits (FDs)

• High liquidity with premature withdrawal options

• Safe and predictable returns

• Can split corpus across multiple banks for added security

• Can be linked to savings accounts for auto-sweep-in/out features

However, please note that the RBI has recently reduced the repo rate by 25 basis points to 6% p.a. This move is aimed at boosting economic activity amid slowing growth and subdued inflation. As a result, several banks may further reduce their fixed deposit (FD) interest rates in the coming weeks. Investors are advised to check the latest rates and evaluate alternatives before making any FD investments.

A prudent strategy would be to split your emergency fund across these options. For example:

- 40% in Bank FDs

- 40% in Liquid Funds

- 20% in Savings Account or Cash

This allocation strikes a balance between liquidity and potential earnings.

Even Warren Buffett Prefers Liquidity Amid Market Volatility

If you are wondering whether holding too much in liquid or low-return assets makes you a conservative investor, take a cue from none other than the legendary investor - 'Warren Buffett'.

Buffett's Berkshire Hathaway is currently holding a record pile of cash, indicating caution amid market uncertainties. In 2024, when 53% of 189 businesses in Buffett's empire reported a decline in earnings, Berkshire Hathaway's operating earnings increased by 71%.

According to reports, Buffett took a cautious approach in 2024, scaling back on stock purchases and trimming Berkshire's portfolio.

This is a strategic move to stay liquid and flexible when opportunities emerge or when markets deteriorate. Buffett has often stressed the importance of staying 'financially unbreakable' and emergency liquidity plays a huge part in that resilience.

Signs That You Don't Have Enough Contingency Fund

• You rely on your credit card or personal loans for emergencies

• You have high equity exposure but no liquid backup

• You don't know your exact monthly expense figure

• You are unable to sustain for even 3 months without a salary

If you are nodding to any of these signs, it's time to pause new investments and focus on building your emergency fund first.

Building an Emergency Fund - Step by Step

Even if you can't build a 12-month emergency corpus right away, it's okay. The key is to start somewhere and build it, gradually, you may increase the corpus. Here's how:

1. Calculate your actual monthly expenses

2. Set a target - Rs 3 lakhs for 12 months

3. Break it down and try saving Rs 20,000 to Rs 30,000/- every month

4. Automate savings into a liquid fund or FD, whichever is suitable

5. Don't touch it unless it's a 'real emergency'

Many investors make the mistake of treating their contingency fund as idle money and get tempted to invest it in aggressive mutual funds or stocks for better returns. This defeats the purpose. An emergency fund is a psychological and financial safety net. The peace of mind it offers during market downturns is worth more than any extra return you could earn.

Final Thoughts: Plan for the Worst, Hope for the Best

As global volatility intensifies, individual financial discipline becomes the strongest armour. Whether you are a salaried professional, entrepreneur, or retiree, having a fallback fund is your ticket to financial confidence.

Don't wait for a crisis to realize the importance of a contingency fund. Start today, because uncertainty doesn't knock before it enters.

In uncertain times, it's not the one with the most returns who wins-it's the one with the most resilience.

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Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.