Emergency Fund is that reserve amount of money saved to cover financial expenses during unforeseen circumstances such as sudden medical expenditure, repairs to property, unplanned travel expenses etc. Medical Contingency fund is a particular emergency fund to be used only for medical expenditure.
It is important for the value of an emergency fund to be sufficient to sustain your medical, living, rental and other essential expenses for atleast 3-4 months. During an emergency one needs immediate cash and atleast as much as they invested from their savings. Thus, an emergency fund set up should necessarily have two properties; it should be liquid, and the risk on the investment should be low. Thus, the effective measure to invest the emergency fund are through savings accounts in banks or as short term debt funds.
Options of investment become limited in case of emergency funds. However, many financial institutions release emergency specific short-term debt funds, particularly for medical expenses. This is because cost of medical treatment in India is on a steep incline. The rate of inflation of medical treatment is twice the aggregate inflation rate in the country. Thus, having an emergency fund during the time of emergency prevents bankruptcy or breaking your financial back.
However, this fund should be built gradually. Accumulating for emergency fund should neither hamper other investment prospects such as retirement or child plan nor narrow your cash flow. About 10-15% of your savings can be invested into emergency funds.
For example a person earns INR 60,000 and saves 30,000 a month. He decides to invest in a saving debt fund offering 5% interest per annum. He starts to invest INR 5,000 a month. In the next ten years he manages to have a kitty of 6 Lakhs invested and 1.5 Lakhs as interest. If after 10 years from beginning the investment, he or someone from his family faces a health issue, he has 7.5Lakhs to his disposal for their treatment.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.