An SIP enables you to invest in mutual funds in a systematic, automated fashion. If you're new to investing, it's a good idea to stick to a monthly SIP since you probably get your salary paid on a monthly basis.
A pre-determined fixed amount is auto-debited from your bank account and invested into one or more mutual funds of your choice. If you don't know which mutual funds to invest in, you can ask your relationship manager from your bank to show you a list of all mutual funds, their returns, and which mutual funds your relationship manager suggests you invest in. You can also easily find this information on the internet and make the decision yourself.
Through a simple Google search, you can easily pull up all mutual funds in India and their historical returns. Ensure that the mutual fund(s) you select meet the following criteria:
1. The total Corpus, or asset size, of the mutual fund is large. 500 Crores is a good reference point. Of course, there are outstanding mutual funds that do not have 500 Crores in assets, but if you're a newcomer, this a good general rule of thumb.
2. The mutual fund has been in duration for at least 5 years (the longer, the better).
3. The "Fund Family", or Fund House, is well reputed. In general, if you can recognize the Fund Family (such as HDFC, Reliance, SBI, Birla Sun Life), you are probably good to go.
4. Ideally, the SIP is in conjunction with the bank you're already banking with. Contact your relationship manager at your bank. He/she can get you set up.
The Power of an SIP
Suppose you set aside 10% of your monthly salary towards an SIP, and your monthly salary is Rs. 60,000. A cursory glance at some of the largest mutual funds in the country shows that many have consistently outperformed the overall market over a large span of time. For example, one of the largest mutual funds is the SBI Blue Chip Growth Fund. It has over 1000 Cr. in assets and launched the fund in June of 2006.
Suppose you began investing in this fund through an SIP from June 2006. Each month, Rs. 6000 will have been automatically taken out and invested into the fund. Notice how we have taken care of those two major tenets we referred to earlier: consistency and discipline. The SIP automatically takes out Rs. 6000 each month; and discipline is not an issue anymore, since the mutual fund makes the investments on your behalf.
The benefit of the SIP is through the incredible power of compound interest. The Rs. 6000 you set aside accumulates compound interest month after month. From June 2006 through March 2015, you would have had Rs.6000 auto-debited 106 times (106 months). Therefore, Rs.6000 x 106, or Rs. 636,000, would have been your investment amount.
The overall return, however, would have netted you close to a 17% annualized return (compounded). Your total investment value, therefore, would be worth exactly Rs. 1,408,109! Your investment not only more than doubled in value, but you did not have to spend a single minute thinking about when to invest. A SIP does it all for you.
Better yet, the Sensex (which is a gauge for how the overall market performs) went up in value by 188% during those 104 months. This mutual fund, however, went up in value by more than 300%. Generally speaking, well known, respectable mutual funds outperform the market consistently.