Why your emergency fund may not be enough
Most people build an emergency fund to cover job loss or prolonged income gaps. That fund is vital, but it is not always sufficient. Unexpected bills — think urgent dental surgery, sudden home termite damage or a major appliance replacement — often arrive as one-off shocks that can force you to dip into long-term investments.
What a “shock absorber” fund does
A shock absorber fund sits between your emergency savings and your long-term portfolio. Its sole job is to absorb mid-sized, immediate expenses so you don’t have to sell equities or withdraw from retirement accounts at the wrong time. In short, it protects growth assets from erosion during market downturns or short-term cash needs.
Common uses
- Urgent medical or dental procedures not fully covered by insurance
- Home repairs after pest damage, leaks or sudden structural issues
- Car repairs, urgent travel or short-term family support
Where to park your shock absorber money
Look for instruments that balance liquidity, low volatility and modest returns. Two practical options:
- SIPs into short-duration or conservative debt funds: Small, regular investments create a ready pool without exposing you to high market swings.
- Arbitrage or liquid funds: These are designed for short-term parking with better returns than a savings account and easy access when you need cash.
How to size and structure it
There’s no one-size-fits-all number. A sensible approach:
- Estimate common one-off costs you’ve faced in the past 2–3 years and use that as a baseline.
- Keep the fund distinct from your emergency buffer — treat it as a separate goal or folio so it’s not mixed with long-term savings.
- Use SIPs or periodic top-ups to build the fund over time rather than trying to deposit a lump sum all at once.
Simple rules to protect your long-term portfolio
- Earmark, don’t commingle: Maintain separate accounts or folios so you don’t raid retirement or equity holdings for short-term needs.
- Prioritize liquidity: Make sure you can access money quickly without significant penalties.
- Review annually: Reassess the size of the shock absorber fund as family needs, home ownership and health costs change.
Building a dedicated shock absorber fund is a small step that prevents big damage to long-term returns. By earmarking specific SIPs or arbitrage/liquid funds for these gaps, you keep your investment plan intact and reduce the chance of selling assets at the worst possible time.