I am planning to create FD from banks worth 5 lakh + and would like to divert the interest amount towards my life and health insurance premiums for the long term basis as it is life long we need to pay premiums.
However I would be holding blocking around 5 lakhs in FD which will fetch only about 8 to 9% interest where as if i invest these in mutual funds i may generate more interest.
These FD’s also act as emergency fund for me for the long term.
Please suggest if this is good plan or do you recommend any changes.
Bshravan-In my view if you feel that this Rs.5 lakh is your emergency fund then you have to make it an FD. However, please note that you can easily accumulate the Life and Health Insurance premiums by doing a RD of a year to match with premium dates. But do remember that in case something happens to you and if you withdraw money from this deposit then it may hamper your premium payment. No equity investment for emergency fund investment. You may or may not generate more interest due to market volatility in equity market. Hence, stay away from any equity investment.
My personal opinion is to create a RD to match timing and amount of premiums you have to pay. Keep this emergency fund distributed as-1/3 in Savings Account, 1/3 in Liquid Fund and another 1/3 in Bank FDs. Review your emergency fund once in a year and increase accordingly. Ideally we must not expect return from an emergency fund. Out aim is to keep it aside in such a way that it must be accessible all time.
At the same time, please remember that you have to review your emergency fund once in a year and match with your commitments.
Thanks Basu for the quick response ! My intention to create FD is to take care of my premiums every year, however i would like to do investments like MF sips through my salary so that i don’t have to worry about my premiums every year. It hardly takes couple of hours to withdraw money from FD on weekdays. I don’t want keep money in savings which may give us a feeling of idle money usually which will go for impulsive spending.. do you really think distribute this again to liquid funds as well ?
bshravan-I personally split my emergency fund into each FD equal to one month expenses and create an online FD using internet banking. When I need then I liquidate based on my requirement. I suggested liquid funds only to benefit the interest rate movement (even though it is small). As I said above, you can create an FD and pay premiums. However, don’t invest in equity. Do remember that to review your emergency fund requirement once in a year.
Sure…Alright! Thanks for the clarification! You are doing great job helping investors and creating awareness on personal Finance ! Keep up the good work! 🙂