Work out a reasonable emergency fund target based on your monthly expenses, job stability, and how many people depend on your income.
The baseline is 3-6 months of essential expenses for someone with stable income and no dependents. This is extended for less predictable income (freelancers and business owners typically need a longer runway since income can be irregular) and increased further for each dependent, since more people rely on that income continuing uninterrupted.
A common guideline is 3-6 months of essential expenses, extended to 6-12 months for less stable income (freelancers, business owners, or those in volatile industries) or if you're the sole earner supporting dependents.
In a liquid, easily accessible instrument like a savings account, sweep-in FD, or liquid mutual fund — not in equity investments or anything with a lock-in period, since the whole point is being able to access it quickly without penalty during a genuine emergency.