Here are the 3 simple steps to construct a SIP portfolio:

STEP 1: Choose an Equity Fund.

To begin, you will have to ask yourself what would be the time frame you intend to stay invested and what amount of risk you could take. If you are risk - averse, you may choose a fund which is categorised as Large Cap; if you have higher risk appetite, then you could also look at Mid Cap funds; and if you are a really brave-heart when it comes to accepting risk, you may choose a Small Cap fund. Each of these caps invests in large, mid or small companies and depending on which one you choose to invest into, your portfolio's risk-return will be impacted.

Secondly, always buy quality funds which have performed over the years. Although past performance does not qualify the fact that it will generate the same returns in the current situation, it gives you a clear idea about how the fund had performed in prior years. The other factor to look into is the expense ratio.

Expense ratio is the expense that an investor has to pay to the fund house on a yearly basis. This charge is deducted from the net asset value of the mutual fund. Expense ratio is the expense that the fund incurs, which include management fees, administration and transaction costs, and marketing expenses. From an investor's point of view, the lower the expense ratio, the better is the return, as you have to pay less.

Volatility is a part of equity market and there are frequent ups and downs associated with the market. However, equity markets have the potential to generate superb returns. If one looks closely then it can be seen that equity markets have performed well over a longer period of time.

Source: www.bseindia.com

Chart 1: Showing the performance of BSE Sensex as on 21st June 2012

The above chart tells us that how BSE Sensex has performed over the last 21 years as of 21st June 2012. The Sensex has moved from 1900+ points to 21,000 points before crashing due to global financial crisis in 2008.

Source: www.bseindia.com

Chart 2: Showing the BSE Sensex returns as of 21st June 2012.

STEP 2: SELECT A DEBT FUND

Why Debt funds is the next question that must be lingering through your minds.
We have taken Debt funds because it provides relief to investors during turbulent times by providing stable returns. Debt funds are the mutual funds which invest into a variety of debt securities like treasury bills, government securities or gilts, Certificate of Deposits (CDs), Commercial Papers (CPs), bonds and money market securities which are usually considered to be safe.