Sinking Funds

Sinking funds are reserved funds designated for future expenses or debt repayment. Regular contributions build up funds to cover large expenditures, enhancing financial stability and planning.
Sinking Funds
3 min

A sinking fund is a fund used to set aside money over time for a specific future expense. It involves regularly depositing a fixed amount of money into a separate savings account or financial instrument. A sinking fund is established to cover unforeseen major expenses, helping to avoid the need for loans or immediate out-of-pocket payments. This essay is going to explain what a sinking fund is, identify types of sinking funds, and explain its source of establishment.

What are sinking funds?

Sinking fund refers to a fund established by an economic entity by ensuring enough money saved over a long period to pay a debt or replace an asset. Assets may include machinery, equipment or vehicles that rapidly depreciate and need renewal shortly after purchase. This method involves long-term debts such as bonds, mortgages or loans. This method is centred on saving up money over time until it is needed to pay a debt or replace the asset. The reason is to avoid taking another loan, which may result in extra interest or other financial consequences.

Formula of Sinking funds

The sinking fund formula will identify how much you need to set aside every year to accumulate a certain amount over time. It is particularly helpful if you have a debt or an asset that needs to be paid or replaced in a few years.

The formula looks like this:

S = (P * i) / (1 - (1 + i)^-n)

Where S – the amount that needs to be saved every year; P- the entire amount that should be paid off or the cost of the asset today; i – interest rate; n – how many years you will keep this saving. For instance, if you have a loan of Rs. 500,000, which needs to be paid in 10 years and the interest is 5%, then according to the sinking fund formula, your yearly saving should be Rs. 65,145. It means that you need to save approximately Rs. 65,145 every year for 10 years to be able to pay the loan. This approach allows saving on a constant basis for a large payment and minimises the necessity to apply for another loan or suddenly use one’s savings.

Sinking funds offer investors exposure to money that is set aside which can be used in times of need, providing opportunities for both SIP investment, allowing regular contributions, and lumpsum investments , enabling one-time allocations, catering to varying investment preferences and goals.

Method to calculate Sinking fund

Regarding the sinking fund method, it is a good way to manage the payment of debts that have accumulated over many years and need to be paid at the same time or replacement assets. Initially, a sinking fund is created and a fixed amount of money is allocated to it every set period. Over time, this pool of money will become larger, and then there are available funds to pay an old debt or replace the asset. Every year you allocate a certain amount of money to a sinking fund. After 20 years, you have money that allows you to pay off the remaining debt and not take a new loan.

Types of sinking funds

Sinking funds can be used for various purposes, each tailored to different financial needs. Here are some common types:

  1. Debt repayment sinking fund: This is set up to pay off long-term debts like mortgages, car loans, or credit card debts. By saving a little at a time in this fund, you can gather enough money to clear the debt when it's due, helping you avoid additional borrowing or high interest rates.
  2. Asset replacement sinking fund: This fund is for replacing assets like cars, machinery, or equipment. Regular contributions help you save up to buy a new asset outright when the old one needs replacing, avoiding the need for loans or using up your savings.
  3. Emergency fund: This is designed to cover unexpected expenses such as medical emergencies, home repairs, or urgent car fixes. By putting money into an emergency fund regularly, you can handle these surprises financially without needing to borrow or use credit.
  4. Education fund: This fund helps save for educational expenses like college tuition, books, and other fees. Regular savings can build a fund that covers these costs, reducing dependence on loans or scholarships.
  5. Retirement fund: Aimed at saving for retirement, this fund ensures you have enough to support yourself later in life without relying solely on Social Security or other government benefits. Regular contributions build a substantial nest egg over time. You can also invest in retirement mutual funds for to create a retirement fund.

How to start a sinking fund?

Starting a sinking fund is a straightforward way to reach your financial targets. Here's how to do it:

  1. Set your goal: First, decide what you're saving for, whether it's to pay off debt, replace an asset, or cover a future expense. Figure out how much money you'll need and the deadline to achieve this goal.
  2. Determine your contributions: Next, calculate how much you need to save regularly. You can use the sinking fund formula, which considers the interest rate, how many times you'll make payments, and the current value of what you're saving for.
  3. Open a separate account: To ensure you don't spend the sinking fund on other things, open a dedicated account for it. This keeps your sinking fund money separate from your regular spending.
  4. Make regular contributions: With your account set up, start making regular contributions. This could be weekly, monthly, or quarterly, depending on what suits your budget and financial plan best.
  5. Track your progress: Keep an eye on your savings. Check regularly to make sure you're on track to meet your goal and adjust if necessary. This will help you stay motivated and make any needed changes along the way.

Benefits of investing in sinking funds

Sinking funds are a practical financial tool that offer several benefits:

  1. Avoid debt: By saving bit by bit for large expenses, sinking funds help you avoid taking on debt. This means you won’t have to pay interest on loans or credit cards for big purchases or bills.
  2. Reduced financial stress: Knowing you have money set aside for future expenses can reduce anxiety about how you'll cover them. This makes financial surprises more manageable.
  3. Helps in budgeting: Sinking funds require you to plan and set aside money regularly, which improves your overall budgeting skills. This disciplined approach can enhance your ability to manage money.
  4. Ensures timely payments: Whether it’s for a tax bill, insurance premium, or a mortgage repayment, sinking funds ensure you have the necessary funds when these large payments are due.
  5. Flexibility: You can start a sinking fund for nearly any purpose, from holiday gifts and vacations to home repairs and vehicle maintenance. This flexibility allows you to prepare financially for any aspect of your life.

Overall, sinking funds can be a powerful way to handle your finances, giving you more control over your spending and saving.


A sinking fund is a financial strategy designed to help you save for future expenses. Depending on what you're saving for, there are different types of sinking funds to cover various needs. Setting up a sinking fund is easy. It involves a few clear steps: define what financial goal you want to achieve, calculate how much money you need to save regularly, open a dedicated account for this fund, consistently contribute to it, and keep track of your savings progress. By doing this, you can meet your financial targets without having to borrow money or dip into other savings when expenses come up.

In managing investments, the Bajaj Finserv Mutual Fund Platform emerges as a key tool. This platform offers a diverse selection of over 1000 mutual fund schemes, catering to different investment needs, from beginner individual investors to large institutions planning endowments. It simplifies the investment process, making it more accessible and helps align investors' financial contributions with their long-term goals in areas like education, research, and innovation. The Bajaj Finserv Platform does more than just manage funds; it provides expert guidance to ensure that investments make significant and lasting impacts.

Calculate your expected investment returns with the help of our investment calculators

Investment Calculator

SIP Calculator

Lumpsum Calculator

Step Up SIP Calculator

Mutual Fund Calculator

Brokerage Calculator

FD calculator

Frequently asked questions

Is sinking fund a cash fund?
Yes, a sinking fund is a cash fund. It is a designated pool of money set aside by a company to repay debt or replace assets, ensuring financial stability and adequate funds are available for future payments.

Is sinking fund compulsory?
No, a sinking fund is not compulsory. However, it is a prudent financial practice for businesses managing long-term debt or asset replacement. It ensures that funds are available for large expenditures without the need to secure new financing.
What is sinking fund formula?
The sinking fund formula is typically calculated as S= (P * i) / (1 - (1 + i)^-n). This formula helps businesses determine the amount of money they need to set aside periodically to cover the total amount due at the maturity of their debt.

Why do they call it a sinking fund?
The term "sinking fund" comes from the idea that the fund helps to "sink" (reduce) debt. Over time, regular contributions to the fund decrease the outstanding principal amount, effectively "sinking" the debt until it is fully paid off.
What is a sinking fund example?
A sinking fund example could be a company setting aside Rs. 20,000 each year into a fund to replace a piece of machinery valued at Rs. 100,000 in five years. This proactive approach allows the company to manage its asset replacements smoothly without financial strain.
What does sinking mean in finance?
In finance, "sinking" typically refers to the gradual reduction of debt. It involves periodic payments into a sinking fund, which are used to repay or buy back bonds or other forms of debt before their maturity, thereby "sinking" the total amount of outstanding debt over time.
Show More Show Less

Bajaj Finserv App for All Your Financial Needs and Goals

Trusted by 50 million+ customers in India, Bajaj Finserv App is a one-stop solution for all your financial needs and goals.

You can use the Bajaj Finserv App to:

  • Apply for loans online, such as Instant Personal Loan, Home Loan, Business Loan, Gold Loan, and more.
  • Explore and apply for co-branded credit cards online.
  • Invest in fixed deposits and mutual funds on the app.
  • Choose from multiple insurance for your health, motor and even pocket insurance, from various insurance providers.
  • Pay and manage your bills and recharges using the BBPS platform. Use Bajaj Pay and Bajaj Wallet for quick and simple money transfers and transactions.
  • Apply for Insta EMI Card and get a pre-approved limit on the app. Explore over 1 million products on the app that can be purchased from a partner store on No Cost EMIs.
  • Shop from over 100+ brand partners that offer a diverse range of products and services.
  • Use specialised tools like EMI calculators, SIP Calculators
  • Check your credit score, download loan statements and even get quick customer support—all on the app.

Download the Bajaj Finserv App today and experience the convenience of managing your finances on one app.

Do more with the Bajaj Finserv App!

UPI, Wallet, Loans, Investments, Cards, Shopping and more


Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.