Every March, the same ₹24,000 health insurance premium arrives and lands on a single month's salary. Set aside ₹2,000 a month from April, and the money is waiting when the renewal notice comes. That is how sinking funds work: regular saving for a cost you can see coming, kept apart from everyday spending. Here is how to set that amount and choose where the money sits.
What Are Sinking Funds?
A sinking fund is money saved in regular amounts for one expense with a known cost and date, like next year's school fees.
Its purpose defines it. The money can sit in a bank account or a mutual fund, but it is reserved for that one cost.
That is also what separates it from an emergency fund. A sinking fund pays for a cost you can predict. An emergency fund covers what you cannot, such as a sudden medical bill or a job loss.
Companies and housing societies run larger versions. Your own plan starts with one number.
How Sinking Funds Work: Working Out Your Monthly Amount
Say you need ₹1,20,000 in 24 months. Dividing by 24 gives ₹5,000 a month, assuming your savings earn nothing.
If the money earns a return, use the sinking fund formula:
Monthly amount = Target × r ÷ [(1 + r)n − 1]
Here, r is the monthly return (the yearly rate divided by 12), and n is the number of months.
Now assume an illustrative 6% a year, compounded monthly, with deposits at each month's end. The same goal then needs about ₹4,718 a month, roughly ₹280 less. That helps, but only at the edges. Your own deposits still carry most of the goal. The 6% is just an example; actual returns depend on where the money sits and are not assured.
Test your own numbers with the goal planning calculator.
Where to Keep Your Sinking Fund
A correct monthly figure means little if the money is worth less when you need it. As with all short-term goals, a nearer deadline leaves less room for a fall in value.
When you need it | Options to consider | Protection or risk |
Within 1 year | Savings account, recurring deposit, fixed deposit | The Deposit Insurance and Credit Guarantee Corporation (DICGC) insures bank deposits up to ₹5 lakh per depositor per bank (as on October 2026) |
1 to 3 years | Liquid and other short-duration debt funds | Not insured; value can move |
Over 3 years | Mutual funds chosen by riskometer | Higher-risk funds can fall close to your deadline |
One common option for the middle row is liquid funds. Under rules set by the Securities and Exchange Board of India (SEBI), a liquid fund holds only short-term loans to governments and companies. Each must mature within 91 days.
Short maturities lower the risk. They do not remove it. Every scheme carries a riskometer, a SEBI label with six levels from Low to Very High. A liquid fund can sit at Low to Moderate. Withdraw within six days and you pay a small graded exit load, a fee for leaving early. It falls from 0.0070% on Day 1 to nil from Day 7.
Check the riskometer of any of the mutual funds Indiabulls Securities distributes against your deadline.
Also Read: If you are exploring mutual funds for your broader financial goals, you can Start Investing in Mutual Funds after reviewing the scheme's risk level, investment horizon and suitability.
Where Sinking Funds Go Wrong
Four slips can undo a sinking fund.
The target is set at today's price. Costs such as school fees often rise before they fall due, because inflation reduces what each rupee buys. Review the target yearly and raise your contribution if needed.
The money gets spent elsewhere. Dip into it, and the planned cost becomes a surprise again. A separate account helps.
Near-term money stays in a fund whose value swings. Move it somewhere steadier as the deadline nears.
The fund doubles as your emergency fund. One sudden expense can then leave the planned cost unfunded, so keep the two apart.
Also Read: To understand how mutual funds differ from exchange traded funds, read our guide to ETF vs Mutual Fund before comparing investment options.
Your Next Step: A Four-Point Sinking Fund Check
Before you start, answer four questions for each cost you want to plan for:
1. How much will it cost when it falls due, not today?
2. On what date do you need the money?
3. What is the monthly amount, with or without an assumed return?
4. Does the place you keep it match that date and your comfort with risk?
Once you can answer all four, you have a plan that sits alongside your wider financial goals. Start with one cost, such as next year's insurance premium, and add others once the habit sticks.
