What is Reserve Fund?
A reserve fund is a collection of liquid or semi-liquid assets that an individual or a business accumulates to meet any unforeseen or planned expenses in the future. The fund may have cash, bank deposits, marketable securities, or other easily convertible assets based on the expected costs and when they will occur. For example, a homeowners’ society may use the fees collected from the residents to create a reserve fund for maintaining and improving the common facilities and infrastructure in the community.
How reserve fund works
A reserve fund is a method of setting aside money or other assets for unexpected or future expenses. An individual, a business, or an organization for different purposes can set up a reserve fund. For example, a reserve fund can help with:
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Emergency situations include medical bills, car repairs, or natural disasters.
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Planned expenses, such as buying a new appliance, going on a vacation, or paying taxes.
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Future obligations, such as retirement, education, or debt repayment.
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A reserve fund works by regularly setting aside a certain amount of money or assets in a separate account that is simple to access and earns interest. The amount and frequency of the deposits depend on the goal and the budget of the fund. The fund should have enough money to cover the expected or unexpected costs without affecting the regular income or savings of the fund owner.
Some examples of reserve funds are:
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A savings account that gains interest and can be withdrawn at any time.
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A fixed deposit has a higher interest rate but a fixed maturity period.
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A mutual fund that invests in liquid and diversified assets and allows partial withdrawals.
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A pension fund that collects contributions from employees and employers and pays out benefits in retirement.
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A reserve fund for a homeowners’ association or a condominium that collects fees from owners and uses them for maintenance, repairs, or emergencies.