What is an SIP? A simple guide to systematic investment plans
An SIP lets you invest a fixed amount in a mutual fund every month. Here is how it works, with a worked example in rupees.
A systematic investment plan (SIP) is a way of investing a fixed amount of money in a mutual fund at regular intervals – usually every month – instead of putting in a large sum at once. The money is debited from your bank account automatically on a date you choose.
An SIP is not a product in itself. It is a method of investing in a mutual fund scheme.
How an SIP works
Every time your SIP instalment is invested, you receive mutual fund units at that day's NAV (net asset value – the price of one unit). If you invest ₹5,000 and the NAV is ₹50, you get 100 units.
Because the amount is fixed but the NAV changes, you automatically buy more units when prices are low and fewer when prices are high.
A worked example
Say you invest ₹5,000 a month for three months:
| Month | NAV (₹) | Units bought |
|---|---|---|
| 1 | 50.00 | 100 |
| 2 | 40.00 | 125 |
| 3 | 62.50 | 80 |
| Total | 305 |
You invested ₹15,000 and got 305 units, so your average cost is about ₹49.18 per unit – lower than the simple average of the three NAVs (₹50.83). This effect is called rupee cost averaging. It doesn't guarantee a profit, but it smooths out the price you pay over time.
Why people use SIPs
- Discipline: investing happens automatically, so you don't have to decide each month.
- Small amounts: many funds accept SIPs from ₹500 a month, and some from as little as ₹100.
- No need to time the market: you invest through ups and downs instead of guessing the "right" day.
- Compounding over time: returns earned can themselves earn returns if you stay invested for many years.
To get a feel for compounding: if you invested ₹5,000 a month for 10 years (₹6 lakh in total) and the fund grew at an assumed 10% a year, the investment would be worth roughly ₹10.3 lakh. Real returns go up and down, can be negative, and are never guaranteed – this is only an illustration of how time affects growth.
Things to know before starting
- An SIP is only as good as the fund. The SIP method doesn't make a risky fund safe. Equity funds can fall sharply in the short term.
- You can usually pause, change or stop an SIP. There is normally no penalty for stopping, although some funds charge an exit load if you redeem units within a set period (often one year for equity funds).
- Missed instalments: if your bank account doesn't have enough money on the SIP date, the instalment fails and your bank may charge a fee.
- Tax: gains on mutual fund units are taxed when you sell. Each SIP instalment is treated as a separate purchase, with its own holding period.
Common myths
- "SIPs always make money." They don't. They reduce the impact of timing, not the risk of the underlying investments.
- "A lower NAV means a cheaper fund." NAV level doesn't tell you whether a fund is cheap or expensive – see our explainer on NAV.
Key takeaways
- An SIP is a regular, automatic investment of a fixed amount in a mutual fund.
- It buys more units when prices are low and fewer when high (rupee cost averaging).
- It encourages discipline and long-term investing, but it does not remove market risk.
- Read the scheme documents and understand the fund's risk level before you start.