127 of You Asked: Where Do I Park My Emergency Fund?

Ritesh Sabharwal CFP®

W.M.W #26: 127 of You Asked: Where Do I Park My Emergency Fund?

Reading time: 5 minutes - December 13, 2025

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Hey Reader

After my last newsletter on building an emergency fund, I got quite a few emails.

127 emails to be precise. All asking the same question:

"I've built my emergency fund. Now where do I park it?"

Rajesh (Mumbai): "I have ₹5 lakhs sitting in savings account. Am I doing this wrong?"
Priya (Bangalore): "You mentioned liquid funds in your 3-bucket strategy. But I heard about arbitrage funds. Which is better?"
Ankit (Delhi): "What's a sweep-in FD? My bank mentioned it but I didn't understand."

So let me answer all of these in one place. Last week, I shared my 3-bucket strategy for parking emergency funds:

Bucket 1 (30%): Instant access
Bucket 2 (50%): 1-day access
Bucket 3 (20%): 7-day access

Today, I'll show you the exact options for each bucket, the returns comparison, and why most people are losing ₹20,000-30,000 every year by parking their emergency fund in a savings account.

Let me break down each bucket with real numbers.

Quick Recap: The 3-Bucket Framework

In my last newsletter, I shared this allocation for my ₹8.5 lakh emergency fund:

Many of you asked: "What goes in each bucket? What are my options?"

Here's the detailed answer.

Bucket 1 (30%): Instant Access Options

Purpose: Medical emergencies, urgent travel, immediate needs
Non-negotiables: Instant liquidity, zero risk, accessible 24/7
Options: Regular Savings account or Sweep in Fixed deposit

What is Sweep-in FD?

A sweep-in FD automatically transfers any surplus funds from your savings account to a fixed deposit when the balance exceeds a predetermined threshold you set. When you need funds, the FD is partially broken automatically, ensuring instant liquidity without losing all accumulated interest.

How it works:

I set my savings account threshold at ₹25,000
Any amount above ₹25K automatically moves to an FD
When I withdraw money (ATM/UPI), the bank auto-breaks the FD in multiples of ₹5,000
Only the withdrawn portion loses some interest; the rest continues earning FD rates

Option 1A: Regular Savings Account ❌

This is where most people park their ENTIRE emergency fund.

Details:

Returns: 3-4% per annum
Liquidity: Instant (ATM, UPI, net banking)
Tax: As per slab on interest
Safety: 100% safe (DICGC insured up to ₹5L per bank)

For ₹2.55 lakhs:

Annual interest at 3.5%: ₹8,925
Monthly earnings: ₹744 (tax exempted in old regime for less than 10k per year)

Option 1B: Sweep-in Fixed Deposit ✅ (My Choice)

This is what I use for my 30% bucket, and it's a game-changer.

Details:

Returns: 7-7.5% (same as regular FD)
Liquidity: Instant (same as savings A/c)
Tax: as per slab on interest
Safety: 100% safe (DICGC insured)

For ₹2.55 lakhs:

Annual interest at 7%: ₹17,850
Post-tax (30% slab): ₹12,495/year
Monthly earnings: ₹1,041

Comparison:

Sweep-in FD: ₹12,495/year
Savings account: ₹8,925/year
Extra earned: ~₹3.5k/year with SAME instant liquidity
The problem with savings account: You're earning peanuts while sacrificing nothing on liquidity. Sweep in provides a better option that gives you SAME instant access with more returns.

Bucket 2 (50%): High-Return Options

Purpose: Bulk of your emergency fund where you can afford 1-2 days settlement
Goal: Better returns while maintaining near-instant liquidity
Options: Liquid Mutual Funds or Arbitrage Mutual Funds

What are liquid funds?

Liquid funds invest in very short-term debt instruments with a maturity of 91 days or less - Treasury Bills (T-Bills), Commercial Papers (CPs), Certificates of Deposit (CDs), and overnight repos. Liquid funds are the best choice for an emergency corpus due to high liquidity (T+1 redemption), low risk, and stable NAVs.

What are arbitrage funds?

Arbitrage funds exploit price differences of the same security across markets. For instance, if a stock trades at ₹1,000 in the cash market while its futures contract is at ₹1,020, the fund buys cash and simultaneously sells futures, locking in the ₹20 spread.

Both positions are hedged, making it market-neutral with low volatility. Because they maintain >65% equity (though hedged), they're taxed like equity funds.

Option 2A: Liquid Mutual Funds

Returns: 6-7% per annum
Liquidity: T+1 (request today, money in A/c tomorrow)
Tax: Per slab (taxed as debt, interest added to income)
Volatility: Near-zero
Exit load: Usually nil after 7 days

For ₹4.25 lakhs:

Annual interest at 6.5%: ₹27,625
Post-tax (30% slab): ₹19,338/year
Monthly earnings: ₹1,611

Pros:

Very stable returns
T+1 liquidity (fast)
Minimal volatility
Well-established category

Cons:

Taxed at 30% slab (high tax for high earners)
Returns similar to FDs but with tax disadvantage

Option 2B: Arbitrage Mutual Funds ✅ (My Choice for over 1 yr holding)

Returns: 6-7% per annum (similar to liquid funds)
Liquidity: T+2 (2 working days)
Tax: 12.5% LTCG (after 1 year) / 20% STCG (<1 year)
Volatility: Low (over 3-month basis)
Exit load: Usually 0.25% if redeemed within 30 days

For ₹4.25 lakhs (held over 1 year):

Annual interest at 6.5%: ₹27,625
Post-tax (12.5% LTCG): ₹24,172/year
Monthly earnings: ₹2,014

Pros:

Best tax efficiency (12.5% vs 30%)
Similar returns to liquid funds
Low volatility (hedged positions)
Over 3-month basis, no instances of negative returns

Cons:

T+2 liquidity (1 day slower than liquid funds)
Exit load for first 30 days
Slightly higher daily volatility (34% of days can show minor negative returns vs 0.5% for liquid funds)
Not ideal for ultra-short holding periods (under 6 months)

Comparison with liquid funds:

Arbitrage fund: ₹24,172/year (12.5% tax)
Liquid fund: ₹19,338/year (30% tax)
Tax saved: ₹4,834/year on just ₹4.25 lakhs

Important note: Arbitrage funds work best when held for 1+ years to get 12.5% LTCG tax benefit. For emergency funds, this is perfect since you're unlikely to touch the entire corpus frequently. Arbitrage funds are a tax-efficient alternative that enjoy equity taxation and offer better post-tax returns compared to liquid funds over 6-month to 1-year time frames.

Bucket 3 (20%): Stable Backup Options

Purpose: The portion you're least likely to touch
Goal: Highest safety + returns, can afford 7-day liquidity
Options: Regular Fixed Deposit (Bank FD) or Flexi/Sweep-in FD

Wait, didn't we already cover sweep-in FD in Bucket 1? Yes, but that was linked to your savings account for instant access. Here, you can open a standalone sweep-in FD that breaks in smaller chunks as needed.

How Flexi/Sweep in FD works:

Instead of one ₹1.7L FD, the bank creates multiple small FDs (say, 10 FDs of ₹17K each). When you need ₹20K, only 2 small FDs break. The remaining 8 continue earning full interest.

Option 3A: Regular Fixed Deposit (Bank FD)

Returns: 7-7.5% per annum
Liquidity: Premature withdrawal allowed (penalty: 0.5-1% interest reduction)
Tax: Per slab + TDS if interest exceeds ₹40K/year
Safety: 100% safe (DICGC insured up to ₹5L per bank)

Option 3B: Flexi/Sweep-in FD ✅ (Better Option)

Returns: 7-7.5% (same as regular FD)
Liquidity: T+1 to T+3 (faster than regular FD)
Penalty: Only on the withdrawn portion, not the entire corpus
Tax: As per Slab

The problem with regular FDs: If you have ₹1.7L in one FD and need ₹20K urgently, you have to break the ENTIRE ₹1.7L FD (and pay penalty on all of it) just to access ₹20K. Withdrawals before maturity attract penalties of 0.5% to 3% on interest, which makes this less efficient.

Advantage of Flexi/Sweep in FD: Auto-sweep FDs allow premature withdrawals without penalty charges on the remaining corpus, offering greater flexibility and liquidity.

What If I Kept Everything in Savings Account?

Let's do the math:
₹8.5 lakhs in savings account at 3.5%:

Annual interest: ₹29,750
Post-tax (30% slab above 10k): ₹23,825/year
Monthly earnings: ₹1,985

My 3-bucket strategy:

Annual earnings: ₹44,402/year
Monthly earnings: ₹3,700

The difference: ₹44,402 - ₹23,825 = ₹20,577/year.
That's ₹1,715/month or ₹20,577 × 10 years = ₹2.06 lakhs over a decade.
Same ₹8.5 lakhs. Similar safety. Same access. But ₹2.06 lakhs more over 10 years.

The Bottom Line: Your Emergency Fund Should Earn More While Still Being Accessible and Safe

Building an emergency fund takes 12-24 months of discipline. Don't waste it by parking all of it only in a savings account earning 2.5 - 3.5%.

The 3-bucket strategy gives you:

Instant liquidity (30% in sweep-in FD)
Best tax efficiency (50% in arbitrage fund)
Stable backup (20% in liquid fund)

No additional risk. No lock-in. Just smarter parking.

👉 Action Step for This Week

Step 1: Look at your current emergency fund amount
Step 2: Calculate 30-50-20 split
Step 3: Open sweep-in FD facility (takes 10 minutes online)
Step 4: Complete mutual fund KYC (takes 10 minutes)
Step 5: Invest 50% in arbitrage fund, 20% in liquid fund (read disclaimer below)

127 of you asked for this breakdown. Now you have it.

P.S - Remember this strategy does not uniformly apply to each and every individual. If someone wants to take absolutely zero risk, then probably you can put more in savings account and liquid fund and some may be in arbitrage fund. But if someone is okay with the risk being much lower and is able to cover up for shorter-term emergencies, then they can put some amounts higher into arbitrage funds and then liquid funds balanced with the savings account. So please use this strategy only depending on your individual personal circumstances.

Got questions about which specific funds to choose or how to set up sweep-in FD for your bank? Hit reply and I'll help you for the same.

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Ritesh Sabharwal