Work out the emergency fund your income actually needs, how long what you have would last, where to hold it, and what inflation costs you to keep it.
How many months should an emergency fund cover?
It depends on how quickly you could replace the income, not on a round number. Six months suits stable salaried work in a large sector. Nine suits variable income, commission, or a sector that lays people off in waves. Twelve suits the self-employed, whose clients tend to disappear at the same time and who have no notice period. A single earner supporting a family should add to whichever applies.
What counts as an essential expense?
What you would still be paying if you lost your income tomorrow. Rent or the home loan EMI, groceries, utilities, school fees, insurance premiums, medicines, and transport to interviews. Not holidays, not restaurants, not the SIP, which you would pause. Most people find the honest figure is 60% to 70% of what they normally spend, which makes the fund smaller and more achievable than they feared.
Where should I keep it?
Split it by how fast you need it. About a month in a plain savings account for the same afternoon. Two months in a sweep-in fixed deposit, which pays deposit rates but breaks automatically when the account runs dry. The rest in a liquid or overnight fund, which credits in one working day and pays more than a savings account. Nothing with a lock-in, nothing with an exit load beyond a week, and nothing that can fall.
Should I invest it instead? The returns are terrible.
The returns are terrible on purpose. You are not buying return, you are buying certainty about a number on an unknown date, and equity cannot sell you that. A fund that was worth six months and is worth four because the market fell in the same quarter you lost your job has failed at the one thing it existed for. Take the negative real return and treat it as an insurance premium.
Does a credit card count as an emergency fund?
No. A credit card is a loan at 36% to 48% a year, and the issuer can cut the limit precisely when your circumstances change. It is a bridge for a few days while a liquid fund redeems, which is a real use. It is not a substitute for having the money.
Why does the fund need topping up?
Because prices rise faster than a liquid fund pays. A ₹3,90,000 fund that covered six months when you built it covers about five after four years of 6% inflation and 4% interest, and less again once your own spending rises. Redo this once a year and add the difference. It is a small amount and it is the difference between a fund that works and one that used to.