Need ₹10 lakh emergency fund? How to split your money between savings accounts, FDs and mutual fund? Plan by experts
An emergency fund of ₹10 lakh can provide financial support during a job loss, medical emergency or an unexpected household expense. However, keeping the entire amount in a savings account may mean earning relatively low interest, while locking it all into fixed deposits or mutual funds could make accessing the money less convenient when it is urgently needed.
The challenge is to balance three priorities: liquidity, capital safety and returns. Financial experts say an emergency fund should be divided according to how quickly the money might be required, rather than invested entirely in the instrument offering the highest returns.
For someone with a ₹10 lakh emergency fund, one possible allocation is ₹2 lakh in a savings account, ₹4 lakh in liquid mutual funds and ₹4 lakh in fixed deposits, preferably staggered across different maturities.
Rhishabh Garg, CEO of FundsIndia.com, suggests this allocation. According to him, the savings account should ideally cover one to two months of expenses, while the remaining amount can be divided between FDs and liquid funds depending on the individual's preference for certainty or flexibility.
Another approach is to keep ₹1.5 lakh in a savings account, ₹4.5 lakh in liquid mutual funds and the remaining ₹4 lakh in an ultra-short duration debt fund.
Sandeep Jethwani, co-founder of Dezerv, recommends this allocation based on how quickly each portion of the money might be required. The savings account can cover immediate expenses, such as an emergency hospital admission, while liquid funds provide access to additional money.
The ultra-short duration fund holds the portion that is less likely to be needed during the first month, although returns are market-linked and not guaranteed.
The three options differ significantly in how quickly investors can access their money.
Savings accounts offer immediate access through UPI, debit cards and online transfers. FDs can generally be withdrawn prematurely, although banks may impose penalties or reduce the applicable interest rate.
Liquid mutual funds typically credit redemption proceeds by the next business day. Some schemes also provide instant redemption, subject to a limit of ₹50,000 or 90% of the investment value per day per scheme, whichever is lower.
Jethwani points out that not every liquid fund offers this facility. He suggests splitting the liquid fund allocation across two schemes from different fund houses that provide instant redemption, improving access to money during an emergency.
Capital protection is another important consideration.
Garg explains that savings accounts and bank FDs are covered by Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance of up to ₹5 lakh per depositor per bank, including principal and interest.
Liquid mutual funds, however, do not carry deposit insurance. They invest in short-term debt instruments, and although their risk is generally relatively low, returns are not guaranteed.
Garg also recommends sweep-in FDs or multiple smaller deposits. A sweep-in facility automatically transfers surplus savings into an FD and allows withdrawals when required. Similarly, splitting money across several FDs means an investor may need to break only one deposit instead of the entire investment.
Returns are another factor when deciding where to park emergency savings.
Savings accounts generally offer lower interest rates, while FDs provide a fixed rate for a specified tenure. Liquid fund returns depend on short-term market interest rates and the securities held by the scheme.
Jethwani says liquid fund portfolios were offering yields of approximately 6.2% to 6.6% before expenses at the time of his comments. However, portfolio yields should not be confused with guaranteed investor returns.
Taxation also matters. Interest earned on savings accounts and FDs is generally taxed at the investor's applicable income tax slab rate. Eligible taxpayers under the old tax regime can claim a limited deduction on savings account interest.
Gains from liquid debt mutual funds covered by the specified mutual fund taxation rules are also taxed at slab rates, but the tax liability generally arises when the units are redeemed.
Jethwani says this difference in taxation timing can benefit investors whose emergency money remains untouched for several years, as the amount can continue accumulating returns before the tax is paid.
Keeping the entire emergency fund with one financial institution can create unnecessary concentration risk.
Garg suggests spreading deposits across two or three banks and using liquid funds for additional diversification. Since DICGC insurance covers only ₹5 lakh per depositor per bank, keeping a larger deposit with one bank leaves the excess amount uninsured.
Jethwani also recommends maintaining a primary bank account, a secondary bank account and one or two liquid funds rather than opening too many accounts.
He highlights another practical consideration. During a medical emergency, the person accessing the money may be a spouse or another family member. Appropriate joint holding or nomination arrangements and clear information about where the money is kept can make access easier.
Ultimately, an emergency fund is meant to provide financial stability rather than maximise investment returns. The appropriate allocation is one that keeps money available when required without exposing the household to unnecessary risk.
Kirti jha
Kirti Jha is a Senior Content Producer at Mint, where she writes on mutual funds, taxation, personal finance and macroeconomic developments. Her reporting focuses on helping readers understand complex financial developments through data-driven, research-backed stories that explain how policy changes, market trends and regulatory decisions affect investors and households. <br><br> Before joining Mint, Kirti worked at ET Money, where she specialised in mutual fund research and investment analysis. She tracked portfolio disclosures, fund manager strategies, sectoral allocation shifts and investment trends, distilling large datasets into investor-focused insights. Her work combined quantitative analysis with consumer-centric storytelling, enabling readers to better understand fund positioning, portfolio changes and long-term investment opportunities.<br><br> Kirti holds a Bachelor's degree in Economics from Indraprastha College for Women, University of Delhi, and a Master's in Finance from the Jindal School of Banking & Finance at O.P. Jindal Global University. Her academic training emphasised analytical thinking, quantitative research and financial decision-making, providing a strong foundation in understanding capital markets, financial systems and economic policy. With a combined experience in investment research and financial journalism, she is committed to producing accurate, accessible and insightful journalism that empowers readers to make well-informed financial decisions.
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