Financial management is not something you should take lightly. It is a life-long process, which begins with saving and investing every rupee you can spare. Sound financial management enables you to grow a corpus and earn inflation-adjusted returns. One of the critical aspects of financial management is creating different funds and cash reserves that you can access easily, whether in an emergency or when you need quick cash. One way to get instant access to money on a rainy day is through reserve funds. Let’s try to define reserve funds, find out how it works, and check out its benefits.
What is a reserve fund?
A reserve fund is a highly liquid corpus that enables you to cover the costs of any potential, unexpected expenses or financial obligations. A reserve fund is usually in the form of cash, held in a Savings Account. You accumulate this cash by periodically putting away money. While companies and financial institutions popularly use reserve funds to fund specific, long term expenses, they are becoming increasingly popular among regular investors.
Read more on why a Savings Account is important.
Reserve fund meaning
Now that you have understood the meaning of reserve fund meaning, let’s break it down to understand how it works. Essentially, a reserve fund is a type of fund in which you can set aside money to cover your routine, scheduled and unscheduled expenses, which you would otherwise draw from your available savings. You can create a general reserve fund for your family and use it to pay for your planned and unplanned expenses. The primary objective of a reserve fund is not only to save money but also to grow it, typically by earning interest on your savings. The interest amount helps increase the fund’s value. Furthermore, by not withdrawing the interest amount, you can benefit from compounding, i.e. you can earn returns on your returns.
That said, your reserve fund should be maintained in a highly liquid account that you can access at any hour; Savings Account, for instance. It should be a financial instrument that does not come with a maturity date sometime in the future, which incurs a penalty on breaking it, like a fixed deposit.
Benefits of a reserve fund
Creating a reserve fund can prove to be incredibly beneficial. Here are the advantages:
- Quick access to funds
The most obvious advantage of a reserve fund is that it gives you quick and instant access to your funds. Since the money is parked in your Savings Account, you can access it at any time of the day or night merely using your cheque book or ATM-cum-Debit Card.
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- Reduces the burden of debts
Most people have to resort to taking on a loan when they need money in an emergency. But by creating and regularly depositing money in the reserve fund, you do not have to take on a loan and increase your expenses by paying high-interest rates on the loan.
- Generates income on idle savings
A significant advantage of a reserve fund is that it generates income on your savings that are idly parked in your Savings Account. You can earn higher interest rates on your savings if you have parked more than a certain sum in your Savings Account.
Now that you know the meaning of a reserve fund, ensure you start creating one to prepare yourself for unexpected expenses. A reserve fund can also double as a tool to create a corpus for some personal goals you intend to achieve in the long run. Open a high-yield Savings Account with HDFC bank to build your reserve fund. You can do that now instantly in few minutes using AADHAAR & PAN CARD.
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*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.