Why you need an emergency fund before SIPs

The most expensive mutual fund mistake isn't picking a sub-par scheme — it's redeeming a long-term equity SIP at the bottom of a market because a medical emergency, job loss, or roof repair landed without warning. An emergency fund is what prevents that.

How much

The standard guidance: 3 to 6 months of essential monthly expenses (rent / EMI + groceries + utilities + insurance premiums + minimum loan EMIs). Single-income households or households with EMIs should lean toward 6; dual-income with no debt can sit at 3.

Don't include discretionary spending in the calculation. If you lose income, those are the first things to go.

Where to park it

Three good options, in increasing-return / decreasing-instant-access order:

1. Savings account (1-1.5 months' worth) — instant, but typically 2.5-4% interest.
2. Liquid funds — T+1 redemption, 6-7% range historically.
3. Arbitrage funds — T+1, taxed as equity (LTCG-favourable if held > 12 months).

A common split is 1 month in savings, 2-3 months in a liquid fund, and the rest in an arbitrage fund for the tax efficiency.

What it isn't

• Not an equity fund. The whole point is that the corpus is there when you need it, with low drawdown risk.
• Not the same as your investment portfolio. Mixing them defeats the purpose.
• Not something to "deploy" when the market dips. Touch it only for actual emergencies.

Rebuild after use

If you draw on it, treat replenishment as a high-priority SIP for the next 3-6 months, before anything else. The fund's value is in being there next time too.