It should be where you see all your folders, not in one. If you downloaded it to your phone directly it'll be in the download folder -- you'll want to move it out of said folder. In other words, you should be able to see both the download folder and the file.
And you'll want to make sure it's named update.zip and not update.zip.zip or update .zip, etc. Anything but update.zip (and the file extension may be hidden) and the install will fail.