In the space of personal finance, its desired to have an emergency fund which is expected to serve you in dire situations. You keep it isolated from your other investments and it must be possible to liquidate in case of an emergency.
Like a dear one is hospitalized, you lost your job etc kind of situations...
Financial wisdom recommends to have at the least 3 months worth of your salary in the emergency funds. 3-6 months of your salary kept in emergency fund gives you that cushioning should something goes awry. You could opt to keep aside a certain sum every month and keep it in a liquid investment option until you reach your goal. Once achieved, come what may, never touch that unless it is for an actual emergency.
Typically people keep it in a flexible fixed deposits, along with their savings account. The reason is steady interest on it though at a low rate of interest that banks provide these days.
Example: If you make 20,000 rupees a month; it would be prudent to keep aside 1 lakh rupees (3 - 6 times) aside. You could potentially open a flexible fixed deposit with your bank and link it with the salary account itself.
I think that is an old fashioned way of doing things and you probably are better served by keeping them in Liquid Mutual Funds. Not that fixed deposits are bad, let's see.
Liquid Funds are class of mutual funds that invests in short term debt funds, typically 90 days or so. These debt instruments are very stable ones and the interest rates do not fluctuate much. The advantage is that, a typical liquid fund can be redeemed and you could get the money, instantaneously for upto 90% of the fund value.
On the other hand, many liquid funds have given out interest rates of around 8 percent. Meaning, if you haven't had a need to take out the money from a liquid fund, it could potentially give you a higher rate than a typical fixed deposit would give you today. Plus high liquidity than that some of the traditional fixed deposit instruments.
A slight change in the way you keep your emergency funds could actually appreciate the overall value of your funds. In the digital age, you don't need to step into any office to get yourself a liquid fund. It can be done from your mobile device itself.
Do think about it...